17th May 2010 – Apple (NASDAQ:AAPL) is one of my favourite stocks, unfortunately I wasn’t able to catch the recent market drop and the buy back at the 200 day moving average, one would have to be really quick to do that. It would have been however a very wise stock market investing decision. Buying a 240 (or lower) Call option on that day, and holding it for at least 3 days, would have turned a $1,000 investment into anything between $3,000 and $6,000.
Markets are expected to resume their rally this week, and Apple stocks (AAPL) will certainly follow suit, the stock is trapped in a $264 – $250 narrowing trading range that will most likely breakout to the upside, if and when this expected rally happens, Nasdaq-willing:
(AAPL) is one of these stocks that have already moved higher a lot, they can be traded for both ‘buy the dips’ strategy and for longer term trading.
I wouldn’t like to speculate too much, but I would feel comfortable buying Call options on Apple stocks (AAPL) expecting a test of the $270 – $290 area, in the unlikely event that the expected rally doesn’t happen next week, then I would like to see 3 consecutive down days before I could buy more Call options, but I would still buy! You can see on the above chart that the institutional investors bought it back, and the only losers were some small private investors who sold off (AAPL) the next day just to meet their broker’s margin requirements. Hence you could safely buy (AAPL) at around $230 and still make at least $1,000 on a $1,000 Call option.
The law of gravity doesn’t apply to the stock market, just because a stock is skyrocketing it doesn’t mean it will ever trade all the way down, it may well remain in ‘orbit’ for ever. And stock options allow you to invest more wisely in these stock market up trends, in a way that, as in the case of (AAPL) here, you will be able to catch 70% to 80% of a potential rally, but only catch 40% – 50% of an equal in magnitude decline.
That is a much better risk reward ratio than buying the actual stock and holding it as a naked investment. In fact one would have to have a lot of money to afford the shares of (AAPL), being at $253 something, 1000 shares would cost $253,000! Where as 10 Call options would only cost around $10,000 to $15,000. Which does confirm that options are probably the safest way to trade these high priced stocks, other alternatives are CFDs and Futures, though in practice they are very risky. And as with the recent deep drop of Apple stocks (AAPL) these ways of dealing would have resulted in margins calls and unnecessary stop triggers.