How to profit from Apple shares. Part 1

The debate rages on about Apple… is it time to buy or sell Apple stock? In this 3 part series we are going to show you how to profit from Apple shares with less risk irrespective of your directional bias. 

  • Some investors think it is time to buy Apple stock. 
  • Others think it’s time to sell! Even short the stock! 
  • Others think Apple is a buy at $100 (over 10% lower than current prices). 

This is what makes a market! If everybody agreed then there would be no sellers or no buyers! We all have our views and opinions…some will be right and others will be wrong. 

But you should ask yourself the following questions:

  1. What is my target price … higher or lower?
  2. How do I participate in my directional bias with the least amount of risk?

Over the next 3 weeks I am going to highlight 3 less risky ways of participating in Apple shares irrespective of your directional bias. This week I will focus on the …….. 

The Bullish Apple Investor:

The simplest way to participate is to buy the stock. But there are less risky ways of participating in Apple. As I write this post Apple is trading at $113.50. 

Let’s say we think the share price of Apple is going to rise to $120 over the next 5 weeks… I’m now thinking ….. rather than risking my money by buying the stock …… is there another less risky way of participating in any upward trend in Apple? 

The answer is Yes! 

There are numerous strategies but I am going to focus on the Bull Call strategy …… Before I continue I would encourage you to complete the bull call spread course… it is free to access. If you are new to options you may want to do the basics of call and put options course first. 

Let’s get into it…..

The Oct 16th Apple $115/$120 Bull Call Spread. 

I’m going to explain this in simple terms. Here are the highlights: 

  • Risk: $178 for every 100 shares.…. We cannot lose any more than that! 
  • Reward: $322 If Apple rises to $120 or above we stand to make a profit of $322! 
  • ROI: 180% if Apple closes above $120. 
  • Trade Expiry: This trade would be valid until Oct 16th only (33 days from now). 
  • Probability: 43%. We have a 43% probability of being profitable on this trade. 

Let me break down this trade for you. There are two parts to this trade:

  1. Buy the $115 Call Option for $528 per contract: We are paying $528 for buying the Oct 16th $115 Call option. This part of the trade gives us the right but not the obligation to buy 100 shares of Apple at any time between now and Oct 16th for $115. If Apple goes up to $130 for example, we could still buy it at $115 because we own this call option. We could just leave this part of the trade on if we liked … but the trade does cost $528 to place and if Apple doesn’t rise above $115 by Oct 16th we could lose all of our $528! In fact, Apple would need to rise to $120.28 at expiry in order for us to breakeven. So to reduce the risk in this trade we implement part two ….
  2. Sell the $120 Call Option for $350 per contract: We are receiving $350 for selling the Oct 16th $120 Call option. This part of the trade gives us the obligation to sell 100 shares of Apple at any time between now and Oct 16th for $120. If Apple goes up to $130 for example, we would have to sell our shares at $120 because of this call option. We are ‘covered’ on this part because we own the $115 Call which allows us to buy 100 shares at $115! By selling the $120 Call we reduced our risk in this trade by $350! 

Now our total risk is just $178 ($528 minus the $350). 

So we have spent $178 to allow us to buy 100 shares of Apple at $115 and then we limited our upside to $120. If Apple rises above $120 we can only make the max profit of $322. Remember this is a 180% return on investment! 

Is it simpler to just buy the stock? Yes! 

But it is more risky…. There are pros and cons to both strategies…. Let’s have a look! We are going to look at two potential outcomes for buying 100 shares of Apple at todays stock price of $113.50:

  1. Outcome 1: Apple goes to $125
  2. Outcome 2: Apple drops to $100.

Strategy: Buying Apple Stock in the Traditional Way:

  • Risk: Risk is $113.50 * 100 = $11,350. This is one of the biggest downsides to buying the stock…the capital outlay. 
  • Outcome 1: Stock reaches $125. Profit equals $11.50 per share or $1,150. The return on investment is 10%. 
  • Outcome 2: Stock drops to $100. Loss equals $13.50 per share or $1,350. 
  • Probability of Profit: 50%. On any given day there is a 50% chance of the share price going up or down. 
  • Dividends: Yes but they are small with Apple..less than 1% for the year! 

Strategy: Buying $115/$120 Oct 16th Bull Call Spread

  • Risk: Risk is $178. This is one of the biggest upsides to participating in Apple using the bull call spread. The capital outlay is just $178 versus $11,350 for buying the stock. 
  • Outcome 1: Stock reaches $125. Profit equals $3.22 per share or $322. The return on investment is 180%. Whilst the $322 profit is lower than $1,150 profit from buying the stock, the return on investment is significantly higher at 180% versus just 10%. 
  • Outcome 2: Stock drops to $100. Loss equals $178. This again is another real benefit of owning this strategy versus buying the stock. The loss in the same scenario for owning the stock is $1350! So the risk is significantly lower with the bull call spread.
  • Probability of Profit: 43%. The probability of profit on bull call spreads will usually be lower than that of buying the stock itself. This is a drawback on the strategy. 
  • Dividends: No! You do not get paid a dividend with this strategy. 

In summary, as you can see …there are pros and cons to each strategy but it is clear from this example that the bull call spread is less risky than owning the stock. How to profit from Apple shares … the bullish investor might use the bull call as they will have less risk in the trade. 

I would encourage you to complete our basics of call and put options and bull call spread courses. They are free to access and you will gain a deeper understanding of the strategy there. 

If you would like to consider one to one mentoring please request a call back

Next week… we will highlight how bearish investors can participate in Apple with a fraction of the risk.