The 2013 Apple Investment Strategy

Administrative Comments
This Apple Investment Report is an on-going projected which is constantly being updated. Please continue to check back and read everything here. Capitalizing on Apple in 2013 is an active process and the thesis is always evolving.

The Prompt (Extremely Important)
1. Overview: Unfathomably Crucial Information for the Report (REQUIRED READING)

1. Introduction to Short-Selling & Call Options
2. Advanced Options: Creating Vertical Call Spreads

Table of Contents (work in progress)
1. Entry & General Comments Page (this page)
2. Preamble
3. Capitalizing on the Investment Thesis: The Assumptions
4. Capitalizing on the Investment Thesis: Using 2013 Leaps & Call-Spreads
5. Capitalizing on the Investment Thesis: Creating Immediate Vertical Call-Spreads with 2013 Leaps
6. Capitalizing on the Investment Thesis: The Leg-In Strategy for Creating Vertical Call-Spreads with 2013 Leaps (New)

Other Pages
1. Response to Sparky's Comment
2. Moomintroll's Deep in the Money Call-Spread Strategy
3. Coopie: The Difference between Short & Long-Term Outlook

Bullish Cross Apple Model Portfolios for Different Strategies
Introduction to Apple Investment Portfolio Strategies & How to Use them (coming soon!)
1. June 2011 Position: The "Immediate" Vertical Call-Spread Bullish Cross Portfolio for Apple
2. July 2011 Position: The $450 - $550 Leg-In Strategy with Apple Coming soon!

The Bottom-Line
1. Bullish Cross Recommends the $400 - $500 2013 Call-Spread to Capitalize on Apple

The January 2013 $400 - $500 Spread Price (Updated Daily)
7/14/2011 -- $26.30 ($400 Ask $40.25; $500 Bid $23.95)

Warnings & Announcements
7/5/2011 Leg-in Strategy -- Over the weekend I put substantial work in the leg-in strategy. I expect to finish it up during the week. It is Ch. 6 in the table of contents. Look out for it over the next few days.

7/4/2011 Added New Page on Creating Call-Spreads -- Please note that in the prerequisite pages above, I've added a new page called "Advanced Options: Creating Vertical Call Spreads." For those who have limited knowledge with call-spreads, please read this pre-requisite page. Thank you!

7/1/2011 Leg-In Analysis -- Ok. The spread on the $400-$500 calls is starting to really widen here as Apple moves higher. This is why I was trying to hammer home the importance of picking up this spread in the $16-$18 range. At $22 it is obviously still a very good investment. But this weekend I'm going to discuss a leg-in strategy which might start to make a whole lot more sense at our current levels. So you want to take a full spread when we're sitting at a bottom, but once we start to really move higher, but we're still far from an intermediate-term top, legging into a spread makes sense in this scenario. Stay tuned. It's going to be my priority to work on this over the weekend.

More Announcements >>>

194 responses to “The 2013 Apple Investment Strategy

  1. Darrin — Sorry that your comment went missing. I had to take down disqus, because it’s not working well with my suma plug-in. But I got the comment and the code is above.

  2. Hi Andy, I have been following your articles and have been very impressed with them. This has led me to subscribe to this report and hope that we all benefit from your input. Unlike the previous years the main reason the stock hasn’t moved or is under valued in my opinion is due the markets belief that Steve Jobs health has turned to the worse and that the future for Apple without him is very uncertain. Others have mentioned P/E compression, law of large numbers etc. Although these have some effect the earnings and growth seen in the last quarter should have helped the stock move higher or atleast not underperform the market.
    I am keen on looking at your take but am very pessimistic due to the markets fixation that Apple without SJ is worth not investing in (even with such massive growth and earnings ).


    • ggorla — Very good thoughts and concerns. So the Steve Jobs issue is only a problem because of the uncertainty involved. The market doesn’t like unresolved issues. Suppose Steve Jobs decided to take a permanent leave of absence or decided to reduce his position to chairman of the board — much like what we saw with Bill Gates & Microsoft — I think the stock would actually rally to the disbelief of CNBC.

      Here’s how I imagine this taking place. I can see Apple’s stock take a big hit in the morning with a huge rebound to close the day up 6-8%. And what you’ll see happen is a few astute commentator explain this as a removal of uncertainty. When it comes to financial markets, the anticipation and uncertainty of a bad event is almost always more damaging than the event itself.

      Think back to the financial crisis. The worst down day we had during the crisis was when congress decided to not pass the $700 billion TARP plan as a result of Speaker Nancy Pelosi’s partisan speech on the floor. What the market hated about the failure to act was the uncertainty and loss of confidence that the government was capable of acting in the face of a crisis. $700 billion is a drop in the bucket in the grand scheme of things.

      It’s much of the same here. If Apple laid out a succession plan saying “Tim Cook has really been running Apple for a long time now and he’s the man. He’s going to lead Apple. If Tim Cook gets hit by a bus, then this person would take the lead.” Apple just needs to clear the uncertainty and it will be fine.

      Now as to your question regarding why is Apple undervalued, that is a far more involved question that requires a full article. I don’t think the Steve Jobs issue has that great of an impact on the stock. It has some impact, but really the reason for the lack of performance has to do with a variety of issues. First, Apple is the most widely owned stock on the S&P 500. Being so oversubscribed leads to some significant demand issues. If no one is left to buy the stock, then how can it go up? Undervalued or otherwise.

      Secondly, no stock is immune to the market. If the market goes down, then Apple will follow. The question, however is, will Apple outperform on the downside. I think so far it has traded pretty admirably in the face of the recent 7-week sell-off. The stock is no lower than it was heading into April earnings but the market was much higher at that time. So Apple has been outperforming recently believe it or not.

      Let me slate a few articles on these topics for you. I put them up on the white board. Thanks for the great questions.

      Now conclusion wise — these issues are intermediate concerns. Long-term Apple is going to $500 sometime during the 2012 fiscal year. Very few really improbable events would prevent that from happening.

  3. Andy, your thoughts are very valid and hope they bear fruit. I have been following Apple since it was around 80 dollars and have made some decent gains almost entirely through owning LEAPS ( would have made lot more if I had sold them when Apple was at 364, but decided to hold on to them). My main dilemma is what to do now and am looking forward to your analysis in the next few days.

    Couple of things-

    Apple is very secretive and I am sure it will not lay out it’s succession plan unless it absolutely has to. One positive thing is be the fact that SJ has remained as CEO (unlike the last time when TC was made interim CEO) and hopefully this means he is dealing with the complications from the surgery and not from cancer recurrence. I am an oncologist and am familiar with the type of cancer he is dealing with ( every patient is different though and obviously it is impossible guess what he is going through). Do you think the market will behave the same way if he were to step down versus god forbid he passes away?

    As I am a retail investor I have no idea as to how the Funds are managed or what triggers them to buy a particular stock. You say that “First, Apple is the most widely owned stock on the S&P 500. Being so oversubscribed leads to some significant demand issues. If no one is left to buy the stock, then how can it go up? Undervalued or otherwise.” If this is the case then, what will change this and when or who is left to by the stock. I am sure the value investors will not touch it eventhough the P/E is pretty damn good. I do not believe in stock buybacks and stock dividends for companies like with such high growth rates.

    By the way how do I access the white board.

    • ggorla — These are good questions, I’ll get to them in a post.

      “By the way, how do I access the white board.”

      lol. The only way to do that is to come to my office 🙂

      It’s not a metaphorical white board. It’s an actual white board I use as a newsroom index. This is where I slate my article ideas. So if a user has a key questions, I’ll just throw it up as a reminder to write a dedicated post on the topic. Cheers.

      • Looks like you are going to have a long list on your white board!! I have quite a few 300 and 280 LEAPS expiring in 2012 Jan. Should I hold on to them (am still making some money on them) while I wait for your recommendation regarding the 400/500 spreads. Thx

        • Gglora — Those are relatively deep in the money calls. The question here is whether freeing up capital from those calls will help on the 2012-2013 trade. You know, I’m going to write on the topic of 2012 leap holders and what to do. You’re in a far better position than a lot of people. I think there are a lot of 2012 $400 call holders. Right now, they’re probably in the tightest position given the recent market turmoil. I’ll be getting to that. That one was already on the white board! 🙂

          • I agree that for now I am in a better position than someone who has 2012 $400 call holder. But in the unlikely event that the stock goes to 280/300 I will be left with very little room before the options expire. The stock hasn’t moved in the past 6 months and I want to hedge against any macro-economic or other events related to SJ etc which would prevent gains in the next few months before options expiration. I am sure that Apple will report extaordinary earnings in the next couple of quarters which though might not be enough to negate the other issues. I agree with you that hopefully Apple will do well in the long term but in the near term I want to formulate a strategy.

            You mentioned that it is a good time to enter 2013 $400 leaps… Should I sell my 2012 300 leaps and use that capital to accumulate the 400’s ( I know that you are working on writing on this topic ) as you mentioned due to the short term volatility.

            Sorry, I don’t want to sound negative all the time but in these uncertain times I think it is prudent to play safe. I admire your conviction though that the stock will do well in the next few quarters, however volatile it might be. This has helped me in maintaining a positive attitude regarding the long term prospects

          • Andy: hope you address this item about near term / 2012 calls vs 2013 calls/spreads on priority. I think there are many folks in similar situations wondering whether to take the hit and tide over to 2013 bets….. as the stock goes lower (looks like a bad open for another week), this topic would gain more relevance and any action in this regard would make more sense over the next couple of weeks. TIA

          • Yes. I know it’s an issue. I’ll be writing an article on it. I was actually going to write an article on it a week ago.

  4. hi andy, the site looks very nice, i have a few questions about 500 price target by jan 2013, in one of your previous articles and backed up by data you showed that apple is back to the same evaluation it was during the financial crisis and recession, apple from there tripled in a little over a year, in 2010 to 2011 apple went up almost 50% in 7 months or so, apple is in much better position now then they were then and earnings and cash flow are continuing to increase, why couldn’t apple reach 600 or even 700 if the street places a higher multiple on the stock or they split or make a significant buyback? i would also appreicate very greatly your point of view about people that have been accumulating options at higher strike prices(Me), for instance i am buying the 500 2013 strikes w/ the anticipation of selling the higher strikes eventually, thanks

    • Sparky — Very good questions. I created a whole page dedicated as a response to your question. Here’s a link for all VIP subscribers (investment report level).

      • Andy:
        I’ve subscribed to this report and will be looking forward to your update regarding the spread strategy for 2013. I am assuming all your apple related coverage will be under this subscription. If not, pls advise – there are other links on the site which require an additional monthly subscription. I paid 299 one time fee for this investment report on spread strategy. I would be interested in all your apple related articles etc….does the monthly subscription cover other apple related reports which will not be included in this investment report on 2013 spreads?

        • panupam — ok. So there are two basic levels on this site. There is an investment report for sale and a monthly subscription to bullish cross. The investment report includes everything regarding investment strategies for Apple. The monthly subscription to the site covers all of the future writing including a significant amount of Apple material. I’m going to create a members link to the nav bar. I think there’s too much confusion about the different subscriptions.

          • Do I need the monthly subscription to manage my spread investment strategy? You mentioned monthly subscription covers future writing incld significant amt of Apple material – how will that work? I don’t want to miss out on meaningful Apple material that can impact my investment in 2013 spreads. I would assume that any Apple material that impacts the investment is covered under this subscription for spreads – correct?

          • Panupam says:
            “Do I need the monthly subscription to manage my spread investment strategy? You mentioned monthly subscription covers future writing incld significant amt of Apple material – how will that work? I don’t want to miss out on meaningful Apple material that can impact my investment in 2013 spreads. I would assume that any Apple material that impacts the investment is covered under this subscription for spreads – correct?”

            Think of it this way. The Apple material outside of the investment report will be very important to managing an understanding of the future long-term direction of the stock price. It would just give you a personal greater depth of understanding.

            At the same time, I’ll be discussing the position itself over time. It’s an issue of breadth and depth. Everything you need to manage your spread is here.

  5. Hi, I’m looking forward to the rest of your report. Can you explain what you mean by this:
    “My intent is to get everyone at a zero-sum cost basis — by the end of December” ?

    Also, do you see any urgency in buying options/spreads today?


    • To Moomintroll:

      What I mean by that is if you put on spreads at the right times and then remove those spreads, eventually you can get to the point where you have no principal capital at risk. Here’s how:

      Suppose you buy 100 Apple 2013 $400 call options at $28.00 each. That’s $280,000 invested.

      If you are able to sell the $500 call options at $28.00 each, you will receive $280,000 in your account to be used as you wish. If you can create this spread, then you have absolutely no principal risk anymore. Here’s the math:

      100 Call options Purchased
      $400 calls @ $28.00 ($280,000)
      $500 calls @ $28.00 (-$280,000)
      Total cost of the spread: $0.00

      Now suppose Apple closes exactly at $600 on expiration day. Since you are long the $400 calls, those calls would be worth exactly $200. You have 100 of those calls, so your account would receive $2,000,000.

      At the same time, you are also short the $500 calls. Which means you owe your brokerage money for being short. Since you shorted 100 worth of calls, and since those calls that you shorted would be worth $1,000,000 on expiration, you would owe your brokerage $1,000,000 to cover your position.

      Thus, your account would gain $2,000,000 and lose $1,000,000. Your account value would be $1,280,000. That’s assuming you started with $280,000 to begin with and that you invested the entire account on this trade.

      But the point here is to be able to sell those $500 calls at the same price you bought the $400s. That’s one way you can do this. Instead of creating the spread immediately, you’re stepping into it.

      Now this is just one way to do this. I’ll be discussing a variety of different ways. In fact, I’m uneasy advocating just this one method here. This is only intended to illustrate the thrust behind this sentence of reducing principal risk to zero.

      There are a lot of ways to accomplish this. So don’t jump the gun.

      • Wouldn’t legging in reduce the number of spread contracts I can buy with a limited amount of money? Since I’ll only get the cash from selling higher strike calls at a later date, I am limited in the number of lower strike calls I can buy today and hence am reducing the total size of my position. If I do use the cash from selling calls at a later date to buy more of the lower leg, I would be doing so at a higher price presumably. I’m just wondering if it’s clear that the net returns would be higher for such a strategy over simply buying more spreads at a given time… Thanks.

  6. Interesting hypothesis on how the market may treat the presence (or not) of Steve Jobs. I feel you are correct about the market’s perception of uncertainty. I beleive the concern is that without Steve Jobs, Apple will lose its “spark” that differentiates it form competitors with respect to investment in the “right” innovation. Apple chooses carefully what it backs (few products) and projecting the key mass market direction and then building an outstanding user experience to fulfill that seems to be the Apple magic. If the belief is that Steve is the magic sauce that drives the decisions in a particular way, not just what, but how (remember the article about his response to the initial MobileMe rollout), then the impact of no-Steve contributes to the PE compression. My question is, there should be a lower PE level the market will not let Apple go below (without Steve) based upon lower future earnings projections because they may make less “magical” decisions? Is there a Steve PE level vs. a no-Steve PE level or am I too focused on this one aspect?

    • Greg — you’re not too focused on this issue and you’ve laid it out correctly. So the lack of Steve Jobs will have an impact in terms of the market’s expectations for Apple’s ability to innovate and as a result, the market might be paying less off a premium to own Apple. But this will pass in time with earnings etc. It’s not going to be permanently or greatly damaged as a result of losing Steve Jobs. It will be temporary in nature until Apple can prove that the innovation is coming from multiple areas. I’ll be getting into this. Notice in my last article, I mention that there are a lot of factors to consider when projecting Apple’s P/E ratio. This is one of those factors. See here:

  7. Andy,
    Thanks for the quick reply. You just made my day! With the choppy market it almost was plausible. Glad to be here. I would bet the farm too if that was the case.

  8. Andy,
    I was considering legging into a position soon and was wondering what your thoughts are in terms of where AAPL is in its summer cycle (i.e. is it near a bottom or not even close)?
    Thanks in advance,

  9. Agreed, thanks.

  10. Andy,

    I’ve been long AAPL for years and a bit ago I bought 380 Jan ’12 calls, only to average in as they’ve gotten crushed. What do you think is the best course of action? Stay in them or exchange them for 400 Jan ’13 for a better risk profile?

    Thanks a ton.

    • That is the most difficult question on any Apple investor’s mind right now. Hopefully I can answer this through the writing tonight and this weekend.

  11. Hi, Just wondering if we have access to the ‘Charts and Tables’ page. I was able to access them earlier today. Now I’m unable to…
    Thanks for all the work.

    • Hi moom — so wordpress keeps doing that for some reason. That content is for subscribers. So the investment report is completely access to this area of the site. Originally, the report was just going to be a PDF file. But I’ve decided to expand on the offering because I think there is so much more if it’s done this way. But think of Bullish Cross as being somewhat separate from the report itself.

  12. Andy – the questions must be keeping you busy and keeping you from finishing the articles :-). I am planning to be careful about my entry but I’m seeing a couple of different scenarios. There is the initial position on the 2013 400’s (25% is one suggestion) and there is an unfinished position on a vertical spread that was cut off. I get this thesis and the spread strategy but wondering if, a) the article was just not finished yet or is the site cutting off the rest of the article for me, and b) are there going to be a number of strategies, i.e. short term spreads and the long term strategy based upon the 2013 400/500 vertical?

    • Greg — I’m just updating as I write. There’s quite a lot of information that I have to post. I’ve been pretty much using every waking hour I have getting everything put together so I can get to the point where I spend normal hours on this lol. My body basically forced me to crash at 6:30 PM today. I feel asleep at the keyboard. Been doing 2-3 hours a night for the past week.

      But yeah, I’ll get to all of this.

  13. Whoops! Just went back to look and the table did complete. Maybe my connection or maybe just bad timing on the vertical spread article.

  14. I realized that I’m probably reading too early and you’re probably writing the articles as I’m reading. I see what you’re doing now, i.e. laying out a number of strategies based upon a proposed risk tolerance rating. Ignore. I’ll wait for you to finish.

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  16. Hi Andy,

    Assuming AAPL meets your Jan’12 target of $400, would it be more profitable to buy Jan’12 bull call spreads now and then use the proceeds to buy the Jan’13 bull calls at a later date? Or would the Jan’13 calls appreciate so much by then so as to negate the upside of that strategy?


    • There’s too much risk for 2012 at this point for me to support a 2012 trade. Like there are too many variables at work in such a short period of time. I’m focused on 2013.

  17. Pingback: Bullish Cross Initiates Fourth-Ever Buy Rating on Apple | BUSINESS

  18. Hi Andy, I don’t quite know how this works but what happens to call prices if Apple announces a dividend sometime in the next year? I presume the stock price and call prices would rise provided the post-dividend stock price is higher than the strike and fall otherwise. Is that correct? Do you see any risk from this? Thanks.

  19. Andy:
    I just signed up and posted one comment above on the coverage under this subscription regarding Apple – hope you can get to it sometime over the weekend. I’ve one more question. Apple just broke 200DMA on heavy volume today for the 1st time in 2 years. What is the next support? Are we looking at a sub 300 level this summer? I’ve significant position in stock and then hold calls for pretty much all the monthlies and leaps (July, Aug, Oct & Jan 12+13) out there mostly at 325 strike. I’ve not created spreads yet – wondering what to do with the call positions that expire thru Jan 12. If the stock goes below 300, I would probably lose most of the calls that expire this year through Oct. Look forward to your inputs.

  20. Pingback: Bullish Cross Initiates Fourth-Ever Buy Rating on Apple | MONEY

  21. Pingback: Bullish Cross Initiates Fourth-Ever Buy Rating on Apple | INSURANCE

  22. In
    it states “As you can see from the table above, based on the Bullish Cross EPS ($39.15) and P/E (12.5 – 15.0) outlook, we expect Apple to trade between $490 and $590 by November 2010.”
    That’s clearly not right – should it be Nov 2012, and the range $390 and $590? or am I not understanding something?

  23. Great discussion, everyone. Andy, I think you have all of my points covered (on your whiteboard :). Fwiw, I’ve long a lot of Jan 2012 AAPL calls at 300 and 330, originally hedged w/ a spread but had closed out the short side last few months, so overall very long delta. With others, the slide from 364 down has not been particularly nice w/ the delta exposure. Looking fwd to your thoughts on the short-term summer as well as fall. Ideally, hoping for AAPL to break 400, though am considering whether to leg into spreads if we get close to the 355 resistance levels you pointed out earlier. Besides AAPL option strategies w/ focus around Jan 2012 LEAPs, would be interesting to hear your take on:
    – WWDC keynote mention of iPad 14-month sales figure (25m) — backing down to this FQ3, one could extrapolate the 2-month implied #s and get into the 8-9M range. That will likely be an interesting # in the July earnings announcement.
    – Your take on product announcement in Sept (iPhone5/4S) and impact on rev/earnings in FQ1, as well as overall price
    Thanks, looking forward to more.

    • Interesting you should mention the WWDC 25 million iPad number. It’s published in my earnings preview I put up late Sunday night. There an in-depth discussion on it. I don’t miss much. 🙂

  24. What do you think of the Apple being down today, do you think it is going to 300 near term…. seems like it being sold for no reason especially on a up day

  25. Andy, I subscribed to the AAPL investment report. Until recently, I could access the AAPL daily commentary articles and in general, articles with the Apple Articles tag (like your link above). I could not access other articles (such as Daily SPY etc) I had not subscribed to.

    I am no longer able to access it (and it looks like neither is panupam.) Can you confirm that we should be able to look at it and restore access?

    • So that was a mistake on updating. Whenever I update an article it expands access to everyone – -not just subscribers and investment report purchases. The investment report only grants access to information available to the general public and what’s contained on this area of the site. This is describe all over the site.

  26. Sorry, I mean I am no longer able to access AAPL articles.

  27. put-me-through-college

    What is the capital requirement to implement your Apple 500% strategy?

    • What do you mean? I don’t quite understand the question? You can buy 1 single spread at about $17-18 today, which means the minimum amount to invest in this trade is probably around $2,000.00.

  28. andy given that some of us may have $ .. on hold .. upto what price is good to buy this price. When you bought them the spread was $16 now is about $18
    up to what price is a good price to buy this spread… ?

  29. andy can you comment ( when you have some time ) on
    time decay
    and delta on this spread

    I know it may be basic but it helps. though my previous question is more important!
    thank you !

    • I thought about doing that, but people are lost at “what the hell is a spread.” If i start talking about greek symbols, people are leaving the class so to speak lol. I’m keeping it simple. This is a good spread. This spread will probably be worth $100.00 18 months from now and if it fails, it will probably be worth what you paid for it — $20.00. So it’s high potential for reward with low downside risk.

  30. you got it !!! I was just wondering .. good entry price under $20?

    • You’re asking me to tell you whether to buy. I can’t do that. I can only present the case. I’m the attorney, you’re the jury. I can’t render the verdict for you.

  31. . I had not seen your previous response !!! you are great . thanks
    ( english is not my first language.. I suck sometimes. )

  32. Andy, Thanks for the info. How do you think the presidential election next year will affect your thesis? The culmination of the end of the fiscal 2012 year and the election will be only weeks apart. Thoughts?


  33. Andy
    I hope everything with your new family is going well
    While I think your advice is great, I think the organization of the website is confusing. It would help to have one area near the top of the page that has the latest comments. Also maybe a little box that notes that there is a new alert. I realize it’s a new website and that you’re busy these days and I’m sure everyone will put up with some inconveniences as the website develops. Also, how about an email alert for new important postings for subscribers?
    Thanks for all the great analysis!

  34. reposted:
    so we can anticipate and better understand what you will likely next do…. say the market and aapl continues to run up for 3 or 4 days before a correction:

    – at this point would you likely cover to @ 100%… ie., sell 100 additional 500 jan13 calls? (what aapl price might you be looking for here?)

    – then, for the retest of 318-320, i assume you will uncover / buy back some 500′s, at what %? are you likely buy back 100 contracts or more than 100?

    – finally, what triggers are you looking for to deploy the other 40% capital?

    thank you

    • Coopie — I’ll soon be selling $500 calls against the 100 open position. But I don’t have an intention to remove cover. For this portfolio, I’m going to be taking the whole spread and holding it. I’m going to show how you can move in and out of cover. But I think buying the spread is the ultimate way of trading this for reasons I’lll get into.

      I’m waiting for confirmation that we’ve bottomed to deploy the other capital. I have good positions. So I can afford to average in at higher prices if need be.

      • OK. Lets say AAPL retests 320, and the 400 calls are worth say $24.00. Will you use your 41.3% capital to buy $413,000/2400 = 172 more 400 calls?
        Then you would be:
        472 contracts 400 AAPL13 long
        300 short 500 APPL13 short

        Or will you use that $413K to buy more 400/500 spreads, which assuming a 320 retest cost may cost $16.50, so thats $413,000/1650 = 250 more 400/500 calls, which would keep you 100% covered, @
        550 contracts 400 AAPL13 long
        550 short 500 APPL13 short

        • Coopie — I’m looking for 100% cover. The idea behind it is simple. This is the direction I would like most people to go. There are far too many risks the other way. But i will also be presenting the other ways to capitalize on Apple soon. I just need to get to other topics people want me to cover. This is the method I recommend.

          I think most people are far better off taken on a fully covered immediate spread. I know it sounds counter-intuitive to want to short down here, but think of it more in terms of the cost of the spread and the ability to take on your entire position. See you go uncovered, then you won’t be able to purchase as many shares and you take on big risks that you’ll never be able to. I’ll get to this soon. Right now I’m under pressure to watch the close and getting this article out.

  35. Andy, I asked this yesterday in an obscure part of the site. So here I go again:

    Consider the following 2013 call spreads, their max profits based on yesterday’s (June 21) ask and bid prices at close and the price AAPL would have to be in Jan 2013 for AAPL stocks to match this profit:

    240 – 300: 52.5% max profit, stocks match this return if AAPL goes to 480
    200 – 300: 41% max profit, stocks match this return if AAPL goes to 458
    200 – 250: 26% max profit, stocks match this return if AAPL goes to 406

    It would seem like these are a better deal than stocks. Am I missing something?
    If the sky falls and AAPL is below 300 in 2013, these spreads beat stocks. If AAPL does well, these spreads still exceed the performance of stocks until the late 400s.
    Can these spreads really be better than AAPL stock in both risk and returns? Am I missing something?

    • Hmm. Sorry I missed that. Soon I’m going to be creating a forum which will make all of this 100 times easier. If only I can divide myself into 3, everything would go so much smoother. The web developer me, the administrator me and the writer me. Everything has been getting in the way of being able to get so much more content out there.

      Now as for this comment, it’s a good one. I’m going to post it as a page under “other pages.”

  36. Andy, I certainly like the idea of zero-basis spreads, particularly the Jan 2012’s. What are your thoughts (given the fall seasonality of Apple stock) on trying to create multiple zero-basis spreads to play the expected move up as opposed to 1 or 2 of these spreads early on in the next few months? Within a 6 month window, do you think the risk-reward points to no more than $20-$30 spreads?

    • It’s going to be difficult to do at this point and there’s incredible risk involved. So for example, if you bought the $400 calls at $5.00 when Apple was trading at $312.50, the $410 calls are just getting close to that range. But it requires a lot of volatility and time deterioration make it difficult to do in the short-term. You have to be perfect.

      It the strategy works better over the long-term. So attempting to create 10 to 20 zero-cost basis spreads by the time we hit 2013. The reason i think that would be easier is because there will be multiple big swings between and then. Whereas 2012 will be fewer and one mistake can really f it up.

  37. Great points. For the 2013’s, based on the seasonality you have already discussed on this site, what sort of volatility and time frame would you estimate it takes to create $20-30 spreads and rough estimate, how many times during the next 18 months do you think the opportunity will present itself to create these spreads?

  38. Andy, is there a clickable link at the top of the site to the article recommendation page. I clicked on the link you posted yesterday but the only way I could find it again was to use the search engine. Also since you don’t seem to have a problem answering questions during market hours here goes:

    Could you give me an idea of the correlation between volatility in Apple and time decay as it relates taking advantage of a zero-basis 2013 spread? What I mean is that if you buy 100 2013 $400 Calls and play the waiting game on selling 100 2013 $500 calls and the stock goes down 3% after buying 100 calls but before selling 100 calls, how many days would have to pass to cancel out the benefit of that volatility? I’m just looking for a rough estimate.

    • That’s a very involved question and is actually near the very top of my list of chapters I’m going to put out as soon as we get home. It’s actually going to be a chapter in this report and already in draft form. “Premium Deterioration.” It’s the biggest draw-back to doing it this way. You have to be pretty good at timing to get this right.

  39. Hi Andy, or anyone out there that might be able to help. Is anyone else using Sharebuilder (ING) for trading? I’ve only ever bought and sold straight option calls and puts in the past. I’m only now learning about the “call spreads” that this report is all about. I can’t figure out how to make the second part of the trade on the Sharebuilder platform and the rep I just spoke to on the phone seemed to think that selling call options was not something I could do. He said I needed to own the underlying shares or else the trade would be “naked” and they don’t do that. I have “options approval: level 2”.

    I think it’s quite possible I’m not understanding the “sell AAPL 2013 500 calls” part of the trade and don’t know how to explain it to the rep. Ideas?

    Thank you, Andy, and everyone for the great discussions here. It’s been an intense two days of reading and trying to get up to speed on this opportunity.

    • So you are holding the underlying asset. You basically need to tell them that you want to create a vertical call-spread. Holding shares and holding long options is the same thing from the perspective of whether you are covered or not. Both result in selling a covered call. You need to find out whether your account is approved for creating spreads. It could be a higher level. Not sure.

  40. Thanks, Andy. Looks like I can’t. Holy smokes. Should have looked into this earlier.

    Ok, people… trading platform recommendations?

    Fortunately, I’m fairly loaded right now with AAPL Oct and Jan 12 calls, so I won’t miss any near-term move. If I were to follow an AAPL move with my current position into upcoming earnings while I set up another account, could it still make sense to move the position over to the 400-500 spread even if AAPL had moved up to 340-350 and the spread was costing more than the REPORT recommended?

    • So I use Ameritrade. They don’t seem to have issues, but I think you need to have level 3 security to create option spreads. Not sure though.

      • You need a Level 2 Margin account at Ameritrade, and that is why I paid $17 for my spreads this morning instead of $16 on Monday. $%@#! But hey, 17 is great too. I entered the trade at 16 but it was canceled immediately since I only had Level 2 Cash, so I had to wait two days for approval. Covered calls need L2 Cash, but option spreads need L2 Margin. Not sure why I need margin enabled to trade a bull call spread. Level 3 allows naked call option writes, so it makes sense there of course.

        Also keep in mind, you need to fund the account, and then I think I recall reading that you can’t trade options with those funds for 5 days. So if you are going to switch do it before you want to trade.

  41. Hi Andy,
    What happens to the Call Spread 400-500 Jan 2013, if Apple splits stocks sometime in 2012 ?


    • You get double the calls, at half the price and half the strike price. It also means you’re pretty much going to hit your target. If Apple split 10-1 right now and the stock was at $33.10 a share as a result. Pft. It would be a joke easy to move to $50. In fact, it will make it more likely that we see $60 or even $70 a share. If they slit, call holders can go vegas happy. We’ll probably have a Bullish Cross party in Vegas if we get a 10-1 stock split.

  42. Andy,
    I was too busy in the office today to buy the call spread. What would be your upper most price to buy the $400-500 spread? Not too late tomorrow?
    How are the twins? Hope all is well.
    Hope your watching CNBC now about Steve Jobs and Apple.

  43. You wrote –
    And here’s the kicker of the whole thing. Remember those $500 calls that we are short? Well if Apple is trading at $400 come October 2012, those $500 calls would be worthless. In fact, they would only be worth about $0.25. It would cost nothing to cover the position. How do we know this? Well look at the September $420 call options — a strike price that is $100 higher than today’s closing price. Those options have a bid-ask of $0.23 – $0.30. Thus, the spread in October 2012 would be worth just about $19.50 if Apple was trading at only $400 a share. This is by far the most important aspect of the entire report and the largest value of anything I’ve ever written.

    It is crucial that everyone understand these ideas perfectly. Please ask questions if you’re unclear on this math.

    I’m doing self education on options, and am not sure I understand the math and/or ideas you presented in the above paragraph. Could you elaborate of a basic buy-and-hold investor?


    • Wayne — Think about the different ways we can predict what a particular call option will be worth at some point in the future. How do we predict what the $400 January 2013 calls will be worth if Apple is trading at $400 (just in the money) in October 2012? We’re three months from expiration right?

      The only way to come up with an idea of what those options may be worth is by drawing a comparison of a similar situation today. Here’s what I mean. In October 20 2012, the January 2013 $400 leaps expire in three months time or just about 90 days. So to get an idea of what these will be worth, we have to look at some options that are exactly in the money — so $325 — and that expire in three months. That would be the September 2011 options expiration.

      So we have to look at what the September 2011 $325 calls are worth today to get an idea of what the January 2013 $400 calls would be worth if Apple were exactly in the money. As it happens, the $325 calls that expire in September are worth $18.50. So that gives us an idea that the $400 January 2013 calls will probably be worth $18.50 or so three months before expiration — that’s about 90 days left.

      This is all about figuring out what options will be worth in the future, by comparing to an almost exact set of circumstances today.

      Now here’s the whole $500 call option part. Today, the January 2013 $500 calls are worth $8.85. We shorted those calls in order to reduce our cost basis. remember, this spread is about buying the $400 calls long and shorting the $500 calls to create a call-spread.

      So it is also important to figure out what the $500 calls would be worth if Apple were trading at $400 in October 2012. That’s what this is all about. Trying to figure out what the value of this position would be if Apple happened to trade only at $400 three months until expiration. Well to be able to do that, we need to draw a comparison to today. Here’s the comparison.

      September 2011 is exactly three months away from today. We need to find calls that are $100 higher than today’s prices to draw a good comparison to the $500 calls. Given that Apple is $325 today, we need to use the $425 calls as a basis for comparison. Well, the $425 September 2011 calls are only worth $0.25.

      That is important to the inquiry because we are long the $400s and short the $500s. Thus, the total spread would be worth — based on this comparison — $18.50 – $0.25 = $18.25. This is important to understand because it tells us that if Apple were to only be at $400 in October 2012, our call-spread would break even for most people.

      Hopefully this helps.

  44. This is my first leap purchase so I would appreciate some guidance here. Assuming you were going to add another 30K to your position today, what exactly would you buy (and how many) and what exactly would you sell (and how many)? Just trying to confirm the correct allocation of shares for this price. Would the 400’s be a buy to open? The 500’s a sell to open? Thx!

    • If someone were to buy a call and sell a call at the same time, he or she can just create the transaction as a spread. A lot of brokerage accounts permit putting on a spread instead of doing each transaction independently. It’s generally called a vertical call spread. The math is simple. There are 100 shares in every contract. So if an options is trading at $8.50, it would cost you $850.00 to buy 1 contract.

      Selling a call short is a selling to open transaction. Buying a call is a buying to open transaction. Remember, open always mean “i want to open a position” and close always means “i want to close a position.” So sell to open, buy to open, sell to close, buy to close. Buy to close is covering a short position. It’s all over Google.

      In the case outlined above, the spread costs about $18.50 today. So buying 1 spread costs $1,850.00. Now I can’t really help you put on the position. All I can do is outline why the spread is a good investment given the fundamentals. To actually capitalize on this investment, you need to work with your broker on getting that done. That’s what they’re there for and that’s why they charge you money. It would be so impractical for me to be able to manage every position independently.

      Mechanically, if one wants to put on a immediate spread, he or she wants to avoid buying the call and selling the call independently. Really, the only efficient way to do it is to create one transaction. Talk to your broker if you want to put on this position. Google is a wealth of information on this topic.

      Eventually, I’ll try to cover all the introductory material, but I would just simply be repeating what’s already fully available in Google. So I’ve decided to focus on the important topics first.

  45. June 24, 3:57 PM : Andy, based on what you said in the daily aapl trade part of the site about aapl’s short term bearish pattern, I’m tempted to try and uncover some of my 2013 spreads early next week. For example, buying to close some of 360 or 500 calls I sold earlier (all 2013) if AAPL does drop $10 early next week.. and selling again in early July if AAPL does rally like you predict.

    Since you’ve mentioned this idea of covering and uncovering the spreads in this investment thesis a lot and since you own so many spreads, I was wondering if you are planning the same with your model AAPL portfolio. If not, is it because you anticipate the option price changes to be minimal?

    • I plan to hold that position for the model portfolio. Here’s why. This report is meant to give the average investor a chance to just get a good entry and hold it until the conclusion of the trade. We’re averaged in at $17.20. If Apple goes to $500 by January 2013, then we’ll make 482%. That’s what we recommend. I’ll get into these other issues, but I think the best thing is to buy these at a reasonable price and hold them at least until this January when we’ll review the situation again.

  46. Andy,

    There has been a lot of talk about the “max pain” effect on apple lately. While I understand the specifics of what they are talking about, I’m not sure what it all means and what the implications are, esp as an AAPL investor. Could you write some about this at some point?

  47. Hi Andy, Thanks for your work so far I really like it. I have a few questions, maybe its an article or maybe its something you’d rather just answer when you get a free moment.

    1) I would like to know your criteria going forward for taking profits on the AAPL investment. I would like to know what it means to “not be greedy” and how you quantify greed for exiting trades? Consider: On Jun 23, you exited a SPY model trade for a 2 point gain saying: “When we have a big gain like this, I choose not to be greedy.” That gain was 2%. On the other hand, when AAPL rallied from 318.12 to 333.15 on Thur/Fri, that was an immediate 5% gain.

    I would have thought you would have taken some profits considering you’ve said the AAPL downside might be to 320,310,285 prior to the July run up, and that since AAPL weekly max OI was between 325-330 there was a significant risk of being pulled there. I recall you saying then that you thought the risk of not being in AAPL was now greater than the risk of not being in. Again, this comes back to quantifying risk, and greed. You did have exceptional timing for your buy in of AAPL right before the Thursday run up. But you didn’t take profits at the top.

    2) If AAPL were to go down below your cost basis, at any time during this thesis, what level of drawdown / loss do you feel is acceptable? Say it were to go down to 285, is there any point on the way down where you would sell some of your AAPL position?

    3) I think it may be harder for you to predict AAPL than SPY, is this true?

    4) Also I see you have changed the title of this Thesis from “How to Make 500% by 2013″ to “How to Make 300-400% by 2013″, deducting 100-200%. Could you discuss this change or I have it missed it somewhere?

    5) Finally, I would like to know, roughly, how many trades you plan on doing within this AAPL thesis? Is it on the order of just a couple or many dozens? i.e. you’ve done this before… do you predict you will you be making trades on the order of daily, weekly, or monthly?

    Thanks so far, great info, and best wishes for your new family.

  48. Andy, This may be a repost… not sure but here it is!
    Do you feel that taking this spread is best in cash or on margin? Margin costs are about 6.25%/yr. If the spread leaps from an entry range of $16-20 goes to $80, for example, your gain (400-500%) will certainly pay for your margin costs. I guess what I am saying is that I think you can get a bigger bang for your buck if you do this thesis on margin.

  49. In my ongoing work at wrapping my mind around “the trade” and how the $400 calls and the short $500 calls work together as a “spread”…

    Could you outline a simple comparison of investing in the “the trade” vs. investing in straight AAPL leaps, say the 2013 400s and/or 500s? For example, what they would both look like in January if AAPL were at 400 and in October at 450 or 500, and how the short side effects those results?

    I think seeing this would help us spread beginners to better grasp the short side of the trade and how it effects the risk/rewards.

    Thank you for your patience and hard work.

    • Bryon, here are the gains for the Jan ’13 400 calls on Jan 1 and Oct 15 of 2012. You can use an option calculator to get these figures. This assumes that the 400 call is currently priced at $30, and the 500 call is at ~$10, for a $20 spread if you were to buy it today. I did these quickly, so don’t take my numbers as gospel, but they look about right, I think.

      400 Call 400-500 spread
      AAPL @ 400: +71% +70%
      AAPL @ 420: +111% +98%

      400 Call 400-500 spread
      AAPL @ 450: +98% +148%
      AAPL @ 500: +243% +266%

      With the straight call, you’re losing money over time (theta decay). When you have the spread, that is offset to some degree since you have also sold options which are benefiting from the theta decay. So, if the stock appreciates in the near months, the straight call is going to be worth more at that time. If it doesn’t appreciate until closer to the expiration, the spread will be worth more. And, of course, with the spread your profit is capped.

      • My “table” didn’t come out very well, but I think it’s decipherable. On Jan 1, the 400 Call will be up 71% if AAPL is at 400, and the spread will be at 70%, etc.

  50. Hi Andy, I had a basic question about covered calls.
    – Say I have 2013/Jan/400 calls which I bought for $30.00 and then sell 2013/Jan/500 for $20.00 after Appl goes up in the next few months.
    – If the stock ends up at $ 540.00 in Jan/13, what are my profits
    Is it $70.00 + $20.00 (from selling the covered calls) or
    Is it just $70.00 from my original 400 calls.


    • Well. It depends on what you mean by profits. Let’s use cash variables.

      Say you buy 10 $400 calls at $30.00. That would cost you $30,000.00
      Say you sell 10 $500 calls at $20.00. That would return $20,000.00 to your account.

      So now you’re in on the $400 – $500 spread at $10.00 or $10,0000.00.

      If Apple goes to $540 here’s what will happen:

      Your $400 calls would be worth $140 or $140,000.00.
      Your $500 calls you shorted would be worth $40 or $40,000.00
      When you get rid of both, you receive $100,000.00 in your account (Spread is worth $100).

      You remember early on we said that by selling the spread at $20.00, you received $20,000.00 in your account.

      So now your account is wroth $120,000.00. It was worth $30,000.00 when you started.


      Interestingly enough, if Apple went to $830 a share, you would still end at the same conclusion.

      Account worth $120,000.00.

      If Apple went to $1,000,000,000,000,000,000,000,000,000,000,000,000 a share, you would still end up with $120,000.00.

  51. mirrera and Andy… the beginners say “Thank you!” The last couple of comments have been very helpful.

  52. Thanks Andy, the reason I am asking is this… I am using Interactive brokers and when I sold 20 contracts it is not showing the $20,000 as being credited but shows up as “negative” and if the value of the contract value goes down my account shows a gain for that difference. If the value of contract goes up it is showing as loss for the difference in value. It is very confusing and am trying to get some clarification from IB.

    With regards to – “Interestingly enough, if Apple went to $830 a share, you would still end at the same conclusion.
    Account worth $120,000.00. If Apple went to $1,000,000,000,000,000,000,000,000,000,000,000,000 a share, you would still end up with $120,000.00.” I would be more than happy if APPL can make it to even 450 by 2013, as I have expressed before I still think that SJ’s health is the main reason for the stock not moving higher even with such outstanding earnings. I know you think that it would be a short term blip if something happens to SJ and that raise in earnings will eventually take the stock higher (I obviously wish this is the case!!).

    If you look at the stock, it went up before WWDC after it was announced that SJ was presenting . At WWDC he looked worse even when compared to March when he introduced Ipad2 and the stock took a downward spiral (part of it could be that there were expectations for an iphone 5 to be announced).
    The stock will likely trade in a tight range like for instance today where it is underperforming the market. There will always be a lot of buyers at 300 or 310 but what I am saying is that it is unlikely to got to $590 or higher by 2013 as is being predicted by some in AFB (posts at Eventide).

    I am not denying the fact that the earnings in 2013 will be around $40 but I am expecting the PE to be around 12 and that is why your model or thesis is far more practical and reasonable. If SJ comes back then we are sure to see a much higher PE.


    • When you sold the $500 option contracts, you never owned them, so you are selling them short. You need to buy them back at some point, unless they expire worthless, then you basically buy them back for $0. So, the cheaper they get, the larger your gain (on just the $500 options, that is), just like selling a stock short. Now, you also bought options, and those should show up with a positive value. The value of the $400 and $500 options together will total the current value of your spread, which is all you really care about. So, say AAPL goes to $600, the $500 calls will be worth $100, so your loss on those will be huge! However, your gain on the $400 calls will be $200, so your net will be $200-$100=$100 per share. So your gain would be ($100-spread price) x 20 contracts x 100 shares in each option contract. You will not care one bit about your huge losses, because you will have even bigger gains. Does that help, or make things worse?

      • Thanks for the input and yes it helps. The main issue I wanted to clarify was that in
        Addition to the $100 per contract I make from the 400-500 ( if the stock goes above 500) spread, do I keep the say $10/500 call
        I sold. If that is true the actual gain would be $110 if I were to hold on till expiry date. So I will be loosing out on the gains above $510.

        Please feel free to correct me if I am wrong. Thx

        • Don’t think of it that way. It will confuse and bring you back to the same conclusion. Really what’s going on here is this:

          Buy $400s @ $30.00
          Sell $500s @ $10.00
          Buy-in = $20.00
          Max Gain = $80.00
          Max Value = $100.00

          When you sold your $500’s, you got your $10.00 up front to reduce the cost of your $400’s at $30.00. So it’s $100 total.

  53. “If you look at the stock, it went up before WWDC after it was announced that SJ was presenting . At WWDC he looked worse even when compared to March when he introduced Ipad2 and the stock took a downward spiral (part of it could be that there were expectations for an iphone 5 to be announced).”

    Apple has generally rallied ahead of ever WWDC and has definitely fallen after every WWDC. I wouldn’t read too much into that.

    “I am not denying the fact that the earnings in 2013 will be around $40 but I am expecting the PE to be around 12 and that is why your model or thesis is far more practical and reasonable. If SJ comes back then we are sure to see a much higher PE.”

    If Steve Jobs died rather than came back, our P/E would go even higher. Market hates uncertainty and as long as Jobs is related to Apple, Apple will struggle somewhat. They want this resolves. No one thinks he’s coming back for any prolonged period of time.

    Now I don’t think it’s unlikely that Apple will see $600 a share. I think actually it’s probably 50-50. They could trade at a 15 P/E very easily. But I’m developing the thesis on what I know to be a lot more certain which is 12.5 P/E ratio.

  54. By the way, I would be glad to host a party in vegas if the market proves me wrong and APPL goes to 600 if not “$1,000,000,000,000,000,000,000,000,000,000,000,000 “!!!!!!

  55. Pingback: Apple: January 2012 Call Holders Faced with Difficult Choices, ch. 2 | Bullish Cross

  56. Hi Andy. As a very new member I didn’t build a position at the low end although I could have established at about 20 as of today. Should I do immediate spreads at this point rather than trade around it (given low volume rally and whatever happens with macro story in Europe)? As a continuation of that question, do you recommend legging into spreads one at a time now or should I just put on the whole position that I would consider doing? Not sure how to weigh missing out versus appropriate trading/risk avoidance. Thanks Andy!

    • Hi John — First let me say welcome to BC. You know this type of question is entirely up to you. I can’t really make the decision on when to buy or sell for you. But here’s what I can say…

      Read the following:

      Coopie: The difference between short & long-term outlook

      Now what you need to consider is whether you think the benefit of potentially getting in at $15-$16 outweighs the risk of it not getting there and then you might either be priced out entirely or might be forced to buy at $25 or higher.

      There are different strategies for approaching this. Say someone took half their position today. If Apple started running really hard, would you be happy with that 1/2 position?

      The reason I think sub-$20 is a good position is because I think those options would be at a break-even price if Apple closes at $400 in October 2012 — 10 P/E ratio. It also means you can make 400% if Apple closes at $500.

      The reason I took our full position at around the $17 area is because of the implications. At $500 a share, that would be a 481% gainer. I think there’s a very strong chance that Apple will see $500 a share given that it would only have to trade at 12.5 times my earnings estimates to get there. You know so it’s really up to you.

      Legging int0 a position has benefits and so does taking the full position. Like I don’t know every reader’s entire financial situation to be able to comment fully on what to do. I can only really lay out a case for why I think those leaps are probably going to $100 and give past lessons on how people could miss the boat.

  57. hi Andy – small correction – on the Apple Model Portfolio page, in the final table – i think # of contracts should be 581 vs 281.

  58. Thanks Andy. That link was helpful and reaffirms my gut feeling to put the position on in full. I appreciate it as well as your thoroughness with the site.

    • So I’m not sure if you read the daily commentary I put out, but you might want to read the next few days. I think there could actually be some weakness in the very short-term.

      • Andy, is this still your thinking? I just read your SPY update and am wondering what the possible early July rally will impact Apple briefly getting back in the 320’s. If you were adding to the Bullcross position, would you get in right now or see how the next few hours/days go? Thx.

        • So I think the market has clearly bottomed and so has Apple. I think that the very next pull-back will be very telling. If it’s shallow, then bottom is in clearly. If it’s steep, then we might be in for a retest. I’ll mention right off the bat what I think. But notice that the first of the month is usually a very strong day for the markets and so is July during summer corrections.

  59. I did read it. That is helpful.

  60. Andy, Options question…I have been buying Jan 2012 350 Calls and selling the Jan 2012 425 calls against it over the last week or so. My average CB is $17 per spread while the current spread is over $18. So I am up money and not down like many who own the Jan 2012’s. I read all your analysis on AAPL both in the AAPL investment report and your article on Jan 2012 calls. Do you think I should hold them as my CB is low and I only need AAPL to be above $367 in January to make money and I have all the way to 425 or should I sell them and buy the 2013 like is in your investment report???

    • Can’t offer personal investment advice. I try to run through as many scenarios as possible so hopefully people can figure it out. I’ve laid out the relevant data and the different strategies. But that’s as far as i can go. Trust me, if I could give personal advice, I probably wouldn’t even be writing articles. I would just field personal questions all day.

      You know the relevant data for 2012 and the relevant data for 2013. Everything you need to be able to answer your own question is contained in those two articles I wrote about 2012 and this investment report.


    Wanted to share this article. Interesting to note pessimism among some of the fund managers.

    • I know the reporter at Bloomberg. I’ve done some stories with him in the past. He’s relatively new in covering Apple. The thing you have to understand with fund managers et al., is they probably don’t know the seasonality.

      Watch what happens in the second half and how quickly everyone will forget weeklies, Steve Jobs etc.

  62. Andy, Fidelity is telling me my option buying is level 2 not level 3. They will approve me for level 3 but it may take 3-4 days. I would like to execute the 400/500 vertical spread immediately but I must buy it in 2 separate transactions(buy to open 400 and sell to open 500). The 500’s will be covered by common shares I own. Beside the small extra commission, do you see any disadvantage to buying a spread in legs.
    Thanks, David

    • You won’t be able to buy as many shares when buying in legs. Suppose someone has $10,000 to buy a spread. If that person legs into the spread, he’ll be able to get far fewer contracts than if he put on the spread as one transaction. Here’s what I mean:

      Let’s suppose this person wanted to buy the Apple 2013 $400 calls. These calls cost $29.85 right now. Thus, he could only afford to purchase 3 total contracts at $29.85 which costs about $8,955.00. So lets lay out account balance:

      3 2013 $400 calls at $29.85 = $8,955.00
      Cash: $1,045.00

      Now lets suppose he wants to leg into the $500’s. If he sells the $500’s against his position at $9.15 each, he would receive $2,745.00 in cash in his account. This is how things would look like…

      3 2013 $400 calls long at $29.85 = $8,955.00
      3 2013 $500 calls short at $9.15 = -$2,745.00
      Cash = $3,790.00

      Notice because this person legged in, they ended up with $3,790.00 in cash on the sidelines and 3 total contracts. If this person would have put on the spread at once, here’s what would have happened:

      $29.85 – $9.15 = $20.70

      Because the cost of the spread is $20.70, he could buy more contracts. In fact, if he raises $350 more dollars, then he could buy 5 total contracts. So 20.70 x 5 contracts = $10,300.

      In this scenario, he used the entire $10k to get long 5 total contracts. So that is the main difference between legging into a position and taking a position immediately. The other disadvantage is that if the stock price drops after you go long the $400 calls, the $500 calls could end up being worth less than they are today. If Apple dropped $10, the $500’s would probably lose $1-2. You can end up with a much bigger spread or higher cost basis than intended.

      There are lots of risks to legging into a spread.

  63. Thanks for your quick response! Makes perfect sense.

  64. Andy, what do you think the implications are in the short term if Apple does introduce a cheaper iPhone soon in addition to the higher end iPhone5? I think it would be great in the long run as far as substantially increasing the number of potential customers who can be brought into the Apple ecosystem. In the short term though, I wonder if the stock would take a big hit because of concerns about smaller margins.

    Great job on the site and congratulations on the twins! I am also father of twins (fraternal girls that are almost 2 years old).

  65. Hi Andy, regarding your announcement on an upcoming leg-in analysis, would that involve buying new calls i.e. with additional capital? Or uncovering and covering existing spreads? It would be helpful to know just to prepare for any new strategies. Thanks.

    • That strategy should be entirely irrelevant for you. It’s meant for people who didn’t buy below $20.00. The vast majority of investment report subscribers were here when those options were under $20 and trading between $16 – $18.

      This new strategy is meant for people who subscribed after that spread has reached $21.00.

  66. Andy,
    Let’s say you are able to look a month into the future and see that AAPL rises throughout July and starts Aug around 380. Let’s say you have $5,000 to invest. Which of the following two would give you larger absolute profit at that point in time?

    1. Holding uncovered 520 calls ($5k amounts to about 5 – 6 calls)

    2. Holding 520 – 540 spreads ($5k amounts to about 31 spreads)

    Naively, I would guess Option 2 is worse because it includes a short position on AAPL when AAPL was rising.. on the other hand, you’ve pointed out that the lower cost of the spreads can make Option 2 a better deal when you wait until expiry.
    So what’s better in a short term situation like this?

  67. @moomintroll…I would suggest you run the #s yourself w/ option pricing calculators and look at the math, since there are multiple variables affecting option pricing over time (time decay, stock price, volatility, the other greeks). You have to play through what-if scenarios. Clearly, if the stock approaches the strike prices, the spread #2 will far out gain #1. But if you realize that you are far out of the money, and your end price movement 380 puts everything far OTM, then you can do one of two things. Run the #s more precisely w/ an option calculator or simplify/estimate. In the simplify/estimate, let’s say you’re talking Jan 2013, just look at the deltas and ignore all other greeks — deltas for C520/C540 for Jan 2013 are .16/.14. Meaning for every dollar gain, your #1 long position will gain $.16. While the spread will only gain the diff = $.02. Since the # of contracts ratio is only: 31/6 or 5 times as much but the gain diff is 8x….it’s pretty clear for the short-term, small incr gain, the #1 long call will out gain the spread, until you approach the strike prices and/or expiration (deltas will change of course). To put in clearer, you can compute the actual gains (although this is all an estimate) i.e. compare 6 contracts x ($33 AAPL incr x $.16 delta) = 600 x 33 x .16 = $3168 gain. Vs: 3100 x $33 x $.02 = $2046.

  68. Pingback: The Earnings Strategy for 2013 $400-$500 Call-Spread Holders | Bullish Cross

  69. Hi Andy,

    I recently joined and missed your recommendation for $400-$500 spread under $20. It currently is above $30. Do you think there will be a pullback soon that I can get in or just get in now?

    The other question for everyone is whether there a good site I can use to calculate potential
    (max,min, somewhere in between) gain/loss based on a hypothetical option trade?
    Sort of like an option calculator for dummies. TIA



  70. Stanley, yes, Andy advises to wait for a pull back in the next couple weeks. For a calculator, I like

    • @jsanduski: Thanks a lot. I’m still new to the site and trying to digest the massive amount of data 🙂

      Could you give me the link you mentioned or the one that Andy usually signals a buy?



  71. From Andy on Friday (Apple Daily Commentary): “For the next two weeks, Apple is generally above its closing price on tuesday ahead of the result. Then when we get to the last two weeks, it’s down in 5/6 quarters (including the big Q2 2010) and it’s down from the open after earnings in 8/8 cases. Every time. When it’s overbought, it almost always tests support.
    Support in this case is $365.00 I know a lot of you probably think that it’s unbelievable to think this could happen. And I probably won’t wait until $365. I’ll probably buy in the $370′s because I don’t care to buy right at the bottom. I’ll take my drawdown. But that is where the risk lies. Not to the upside as some might think.
    Because EVEN IF i’m wrong and Apple continues forward, it’s going to get even more overbought and at most we may get to $410 before pulling back into at least the $395 level giving me my entry after considerable time decay. So that’s why I’m not antsy and calmly drink my coffee and read my paper on Friday morning as Apple is up $7.00. I don’t’ freak out that it’s going to run without me.”

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