The 2013 – 2014 BC Recovery Plan

Sunday, December 9, 2012 -- this BC Weekly Summary will be referred to as the BC Recovery Plan. As many of you are well aware, Apple decided to have a nearly 30% correction during the most critical period of the year. This September - January period is always the most important era of any option or leap-based Apple strategy. It's critical that Apple trade as normally does -- and that includes corrections -- during this period because if Apple on the 1 in 1000 chance decides to have an outlier event like crash 30% for no good reason, it pretty much destroys any leap strategy based on the January options expiration.

This year, Apple decided, for whatever (we will speculate for ages) to have one of these outlier events as it declined from $700 a share down to a low of $505 between the months of September and November. And even now in December it is still trading in the low $500's and at an historically low valuation. Almost any leap-based strategy resulted in an 80-90% loss as a result of this event. The BC Model Portfolio put on positions in the Apple $600 - $650 and $655 - $705 January spreads during the April - May 2012 correction. We purchased these spreads are relatively cost-basis at the time and based on assumptions that a stock like Apple wouldn't crash 30% in the fall which typically its most prolific period of the year.

But this section of the site is not dedicated to discussing what went wrong, why Apple collapsed or how it may have been averted. Instead, what we will discuss here is how to recover from the loss. Throughout last year, I've explained multiple times that all anyone needs in an options strategy to recover from a crash is 10-20% of their original capital. The reason for that is simple. If the stock crashes, it means it dramatically undervalued which also means it has opened up multiple opportunities to make significant returns during its post-crash recovery period. And that is precise where Apple is entering right now. We will discuss where we think Apple is headed and the different paths to recovery one can take.

From this current price level, I believe there are at least three viable options for a full recovery. There is a 1-year aggressive plan, a 1-year conservative plan and a 2-year conservative plan. Please understand that when I use the terms "aggressive" or "conservative" they are relative terms. These plans are all extremely aggressive from the average investor's point of view. Any options-based strategy by its nature no matter what is going to be consider ultra aggressive. There are just different levels of 'aggressiveness' and varying levels of risk within these different plans.

And to be honest with you, there is no right or wrong path to recovery. Each of these plans I'm going to outline will demonstrate how one can fully recovery from a 90% loss. I'm going to assume someone started with $1 million, lost $900,000 and is now left with $100,000. Depending on each individual circumstances, the path chosen for recovery really depends on the individual risk tolerance, risk preference and time horizon.

For one person, a recovery within 1-year might mean their very financial survival. Without a recovery within 1-year, some people might not make it, so to speak. For others, they can take a longer-term horizon and don't have an immediate need for recovery. Really, there are four plans for recovery. There is a 1-year, 2-year and 3-year conservative plan. Those who choose the 3-year recovery plan, I believe, have an extraordinary high chance of fully recovering their losses and even making some gains.

I'm not going to divulge which plan I'm going to choose for my own personal survival because that could and probably would unduly influence your decision. Your decision has to be made exclusively based on your own personal circumstances. But what I will do is guide people through these plans over the coming year(s). I've been here before and have recovered from 90% losses in the past. I've recovered and come back much stronger. I know exactly what needs to be done to recover and I will help get us all there.

Again, each of you need to choose for yourself which plan makes the most sense based on your personal circumstances. The plans I'm going to lay out below have a very wide range of risk. There are ways to fully recover from a 90% loss in 1-year which is ultra aggressive, and there are ways to recover over 3-years which have a very high probability of success. All of these plans are based on investing in Apple options, leaps and leap-spreads.

Before I begin, I want to make a general statement regarding the assumptions and the basis upon which these plans are based. And then from there we will get into the plans on a more general basis. Then as time goes on, we will develop these plans further.

1. Apples TTM x P/E Ratio = Apple's PPS at Expiration
By now, everyone here should understand how Apple is priced. Apple's stock price is the sum of its trailing 12-months of earnings per share (TTM) multiplied by its current P/E ratio. For example, as of the close of trading on Friday, December 7, 2012, Apple's P/E ratio was 12.08 and its trailing 12-months of earnings (TTM) is $44.15. Multiple 12.08 times $44.15, and you arrive at a stock price of $533.25.

Now in the simplest terms, when we formulate an investment thesis as to which options or spread we would like to purchase in the future, we are making projections as to what we believe Apple's trailing twelve months of earnings (TTM) will be at the time of expiration on top of projecting what we believe the market will assign as a P/E ratio to Apple given the strength (and/or weaknesses) of Apple's fundamentals along with any macro issues which might impact valuations in the market as a whole.

The more conservative ones assumptions are regarding Apple's TTM and P/E ratio, the lower the price-projection for the stock-price. If you get too conservative, you end up with too low of a price projection and could end up leaving extraordinary amounts of money on the table (called opportunity cost). Don't underestimate the damage opportunity cost has on your overall recovery plan because Apple is not going to be around as a great investment forever.

Overshoot on your projections and you run the risk of taking further substantial losses which can further delay the recovery period. The best way to go about making future price-projections is by making reasonably conservative projections based on reasonable conservative assumptions regarding growth and expectations.

For example, expecting Apple to earn $50 in earnings next year when it earned $44.15 last year or expecting the stock to trade at an 11 P/E ratio just because it temporarily traded under a 12 P/E ratio this November I believe are unreasonably conservative projections. They will get you nowhere.

We will make a case for what we believe will be Apple's TTM and P/E ratio next year and we will show all of our work. We will lay out our assumptions, what we know about Apple's production plans and what we believe is a reasonable conservative projection for Apple's stock price. We will then give a bear-case, a bull-case and an ultra bull-case.

It will be up to you to make a decision as to which case you think makes the most sense and formulate your strategy based upon that case. For example, if we believe that Apple under the most conservative outlook will trade at $700 a share at January 2014 expiration, then a 2-year conservative plan might consider buying the Apple January 2014 $650 - $700 or $600 - $700 call-spread. If we think the bull-case is $800, depending on your personal risk tolerance, you could choose anything from a $600 - $700, $650 - $750 or $700 - $800 call-spread. But we will get into that shortly.

For now, the point is this. The key assumption to each of the recovery plans that we will outline is going to be based on projections of Apple's TTM and P/E ratio which is in essence to say it will be based on our ultra-conservative, conservative, and aggressive price-targets on Apple.

Next weekend we will outline our earnings projections for the 2013 fiscal year. The current projections are dated and based on assumption that are no longer present. It also doesn't take into consideration Apple's expensive-curve, the iPad Mini or the new upgrade cycle for the iPad. But for now, our conservative expectation is that Apple will report at least $60 in TTM and trade at a 12.5 P/E ratio by January 2014. That is a $750 a share price-target. That's our ultra conservative projection for 2014. There are reasons to believe that Apple will report closer to $63 to $65 in EPS and trade at a 14-15 P/E ratio despite what just took place this past fall. That would put Apple closer to $900 a share. That is our bull-case for Apple. We still do believe there is a chance that Apple could rally to $1000 a share. While most of you probably think that's nuts, you all also believed it was nuts when I explained that Apple would eventually have a major correction during the parabolic rally. Projections for the other direction always sounds nuts when the stock is currently trading in a different direction. But heed this warning carefully. The environment and sentiment 12-months from now will be radically different than it is today. Just keep that in mind.

So now let's jump into the general outlined plan for recovery. Again, no one plan is suitable for everyone. Each individual investor needs to formulate their own plan of recovery with different risk-profiles and time-horizons. We are assuming in each case that someone started with $1 million, and lost $900,0000 and is now looking to recover his/her capital either in full or in part. Notice that a recovery plan isn't always necessarily the right thing to do either. Recovery, by its nature, is backward looking and one should always be forward looking. How do we make the most out of the opportunity we have in front of us. It's good to set goals for recovery, but keep in mind that it needs to be based on the reasonableness of the investment opportunity in front of you and not based on the blind urge to make a full recovery. The latter is doomed to fail. With that being said, we will begin with the most conservative and end with the most aggressive path for recovery. Again, I'm not going to explain which path I plan to take and will no longer disclose personal positions so as to avoid people making uninformed blind decisions. My personal circumstances requires that I take one path over another. But that path isn't suitable for everyone.

1. The Three-Year Conservative Plan
In my personal opinion, the three-year conservative plan has the highest likelihood of success. Mostly because it is based on the investor making three back-to-back highly conservative investments. Remember, when I say "highly conservative" I'm speaking relative to the world of options. Not in an absolute sense. All of these plans are ultra-aggressive generally speaking. But relative to one another, this is by far the most conservative plan.

Here's what one can do to recover from a 90% loss over three-years. Right now, the $550 - $600 January 2014 call-spreads cost $20.00 to purchase as of Friday, December 7th's close. If Apple reported in-line with analyst expectations $50.00 and traded at a 12 P/E ratio (two pretty darn conservative projections), the stock would trade at $600 a share exactly at options expiration in January 2014. That spread would rise by 150%.

If Stanley, who lost 90% of his $1M investment in January 2013 spreads, took a three-year time horizon for recovery, he could purchase the $550 - $600 2014 call-spreads and as long as Apple closes above $600 at January 2014 expiration, his $100,000 investment in the $550 - $600 spread would rise to $250,000.00. He could then purchase an in the money spread for 2015 for a double which would result in that $250,000 going to $500,000 and do the same thing for the third year in a row.

Just to give you an idea of how conservative his 2015 and 2016 investments would be, it would be the equivalent of purchasing the 2014 $500 - $550 call-spreads today which are priced at $23.80. Basically, you can make a little more than 120% right now so long as Apple rises $20.00 from where it is today by the end of next year. So that would be the three-year for recovery.

This is a relatively conservative plan. But for those who have a long-term time horizon and are willing to be patient and wait it out, most knowledgeable investors can see how powerful this recovery can work. And if you are reasonably knowledge, you can tell right away that this strategy is very likely to succeed. So there you have the three-year plan for a recovery. Go with a very conservative January 2014 spread for a 150% gain, then take that and invest for two back-to-back 100% years. That would result in an overall 900% gain or result in a full recovery from $100,000 back to $1,000,000.00.

There are much faster paths to recovery, but this one is by far the most probable. So that is plan #1. For plan #1, you just need Apple to barely meet the bear-case minimum, and you just need the world to not collapse or an astroid to hit the earth or a zombie apocalypse to occur. Pretty darn good plan for those who have a 3-year time horizon.

But I do think the opportunity cost in going this route is tremendous. Almost extreme.

2. The Two-Year Conservative Plan
Now the second plan for recovery is the two-year conservative plan. Again, there is no "right or wrong" path to recovery, it just depends on risk tolerance, the need for capital preservation, and the time-horizon for recovery. With plan #2, Stanley would recovery is 90% losses over a two-year period by purchasing reasonably conservative 2014 spreads and then choosing ultra conservative 2015 spreads once 2014 is successfully executed.

For example, right now the January 2014 $600 - $700 call-spread is trading at $25.00 as of Friday's close. If Apple reported $60 in earnings and traded at a 12 P/E ratio, the stock would close 2014 at $720 a share. Both the P/E assumptions and the earnings outlook are both relatively conservative in my opinion. And we're going to lay out those cases very carefully over the coming months. But suffice it to say that we feel strongly that Apple will be trading north of $700 at January 2014 expiration even if the same thing that happened this year, happens next year.

Put it this way. Those who purchased the Apple January 2013 $400 - $500 call-spread at $17.20 on our recommendation back in June 2011 are still sitting pretty right now. They are still up 480% notwithstanding what has happened. Even with this crash, Apple is still above $500 a share. And as long as Apple doesn't fall to $417.20 by this January, those who purchased and held onto that spread will at least break even. If Apple closes above $500 at expiration, they will have made 481%.

I think the $600 - $700 call-spread represents a similar opportunity as did the $400 - $500 call-spread in the sense that it is a spread that is very likely under most circumstances to close in the money even if Apple did see permanent P/E compression to sub-S&P 500 levels and reported a meager year. That would put Apple at $720 a share.

That spread is currently trading at $25.00. That means if Stanley, who lost $900k, put his remaining $100k into this spread AND if Apple does indeed close out 2014 above $700 a share, that $100k would be worth $400k. Stanley would then look to purchase a 150% yielding spread for the 2015 expiration -- which by the way -- is a spread that would be just out of the money. So it would likely be a relatively conservative spread.

Also, in 2014, Stanley doesn't need to immediately sell his January 2014 spreads, take his $400k and invest it in 2015's. Stanley could wait for the first major correction of the year and use that opportunity to buy the 2015 spreads when Apple is trading at a very depressed valuation.

This I think is a very strong two-year plan for full recovery. It has a reasonably strong chance of success. Again, if you have a two-year time-horizon, don't mind losing out on opportunity cost and are more concerned with a recovery, this is a good plan. Especially if you have that time horizon.

The January 2014 $650 - $700 spread's are trading at $11.40. If Stanley took that position and Apple ended 2014 above $700, his account would rise to $440,000.00. He would be able to take an even more conservative position for 2015 to make a full two-year recovery.

Now just to get idea of what I mean by risk tolerance etc, there are many variations of this plan. For example, Stanley can do a two-year recovery by purchasing the $600 - $650 2014 spread and then take a similarly balanced spread for 2015. The $600 - $650's are currently trading at $14.50. That would get Stanley to $350,000 by 2014. Then in 2015 Stanley would need to purchase a similarly returning spread. An essential 2-bagger.

Another variation for those who want to take on more risk in order to avoid opportunity cost might consider the $650 - $700 or the $700 - $750 2014 spreads. If Apple earns $63.00 and trades at a 12.3 P/E ratio, that would put the stock at $775 at expiration.

The $650 - $750 spread costs $19.15. If Stanley went after that, his $100,000 would rise to $500,000. He will have recovered half of his losses. If he then went into a 2-bagger for 2015, he would end going from down 90% to up 50% from his original investment.

That right there is a very reasonable two-year plan for recovery while maintaining some degree of opportunity cost. And this is a reasonably conservative position with regards to Apple's stock price, earnings and valuation.

Again, this is an individual decision that has to be made by each person alone. If one wants to go the path of a two-year recovery they must determine whether they want to invest on very conservative assumptions regarding Apple's earnings and valuation or more aggressive assumptions. One can choose to spread the risk equally over the coming two year-period or choose to take on more risk this year given that Apple is so undervalued right now. I personally think this is a generational low valuation point for Apple. It's a 2009-type opportunity. I don't think this valuation will hold and Apple will soon see a revaluation. If you believe that, then you want to go more aggressive for 2014 and then less aggressive for 2015.

But that is the two-year conservative plan. And we will fully develop this plan in a multi-chapter section for the site and help those who follow this plan along the way with information flow. We will overlook each of these plans. But we cannot give personally tailored advice. We will just merely make general comments regarding the three-year, two-year and one-year plans.

3. The One-Year Aggressive #1 Plan
The way I see it, there are three ways to attempt a full recovery from a 90% loss in 1-year. All three ways are ultra aggressive, carry significant risk and have to thread the needle. We will begin with the most conservative one-year plan and end with the most aggressive.

So let's think about time and how it works. In the end, when you invest over three expirations in the three-year plan, you are investing in three expirations. You are just choosing to do so over a three period. But you could also just as easily do that over a 1-year period right? In the end, each of these plans use the power of compounded returns to help generate the 900% requisite gain necessary to produce a full recovery. In essence we are making multiple trades to get us there. Either two 200% returning trades or three 100% returning trades or one 300% returning trade followed by a 100% returner. It's the compounded return over a long period of time that makes this work.

The issue of time just makes people more comfortable because they somehow feel the event is more likely to go their way the more time they have. Not always true. Those who bought the September $680 - $700 call-spread made out big time while those who purchased the October $680 - $700 call-spread got owned. And those choosing October over September did so because they felt they had more time on their side. Sometimes more time isn't necessarily better and isn't necessarily going to make the strategy more likely to work.

So here is a plan that really takes into account the circumstances that Apple is sitting in and looks to leverage that circumstance by making reasonable trades throughout a 1-year period in order to achieve similar results that would be achieved over a multi-year period.

Right now, the Apple April $580 - $600 call-spread is trading at $6.30. April is more than 4-months from now and takes into account Apple's earnings report coming out this January. If Stanley has conviction that Apple is about to have a recovery of some kind and will likely close above $600 at April expiration, Stanley can step right into that $580 - $600 spread at $6.30 with his $100k. If Apple closes at or above $600 at April expiration, Stanley's $100,000 would rise to $320,000.00. Stanley can then take that capital and go into a 2-bagger January spread -- at that time perhaps the $600 - $700 spread -- and have a full recovery by the end of the year. All he did was leverage the current situation that Apple is in to his advantage.

The downside to this is that Apple is really a dead stock, collapses under $500 a share and the market continues with its delusion that somehow Apple is going bankrupt. I really doubt that's the path that Apple will take, but do believe that Apple could easily recover to $600+ by April expiration for a multitude of reasons. One big reason has to do with the fact that Apple has spent nearly 3-months in this corrective, low-sentiment phase. The stock tends to go through phases in terms of sentiment. It goes from highs to lows and back to highs. When it reports earnings and reality sets in, the stock could end-up skyrocketing. So this isn't a terrible plan.

A more conservative or balanced variation of this plan would go out to July or even June. If Stanley goes out to the June expiration, he is at least getting April earnings to his advantage. If he goes to July expiration (which I think is much better than June) then he gets the run-up into July earnings. The July $600 - $620 spread is trading at $6.50. Stanley could always go the route of investing in July and then rolling that capital into the January 2014 expiration. If Apple closes above $620 in July, Stanley's $100k would rise to $310k. Stanley would then have to go after a January 2014 2-bagger to complete the full recovery in two trades next year. If he wants to be more conservative, he could wait until the April 2014 expiration comes out and purchase those in July/August 2013. That would give him more time. So the recovery would take place over a 16-month period instead of a 12-month period.

When it comes down to it, with this strategy Stanley is essentially choosing to make the two trades over a 1-year period of time instead of over a two-year period of time. It's essentially the same type of strategy but instead of going the whole January 2014 and January 2015 route, he goes April 2013 to January 2014 route. He depends on the short-term recovery of Apple's stock off of this extreme correction.

4. The One-Year Aggressive Plan #2
Now here is a different perspective on things. This plan, if executed well, can not only result in a full recovery much sooner, but could also result in gains even. But it is probably one of the most aggressive strategies out there. This is what I call the quarterly strategy. With this strategy, Stanley isn't investing on January 2014 and January 2015 expirations. He's investing in the next quarter's expiration during a well timed period during the quarter. And Stanley would be doing this by choosing a just-out-of-the-money spread for the quarter's expiration.

For example, right now Apple is trading at $533 a share. The January 2013 $530 - $550 call-spread is trading at $9.45. If Apple recovers $20.00 between now and January expiration, that spread would double in value. Stanley's $100,000 would rise to $200,000 at January expiration. Then after Apple reports January earnings, Stanley would wait for an optimal entry into April spreads. He would probably choose a just out of the money spread the same way he did with the $530 - $550 spread. If he rolls the $200k into the April expiration, and the April spread is successfully executed, that $200k would rise to $400k. If he does this again in July, his capital would rise to $800k. And finally if he makes a January 2014 2-bagger investment in July, that $800k would rise to $2.4 million. By successfully executing a January, April, July and January 2014 trades consecutively, Stanley would take his $100k and not only fully recover his $1M, but make an additional $1.4M in the process.

Stanley just went from being down 90% to being up 140% in 1-year. But to do this, he would need to successfully execute a January 2013 spread, an April 2013 spread, a July 2013 spread and a January 2014 2-bagger (after July earnings).

This follows a variation of what we did all last year quite successfully each quarter. We did the October $370 - $380 spread, the January $370 - $380 spread, the April $410 - $430 spread, the July $480 - $500 spread, the July $570 - $590 spread and the October $565 - $585 spread. So basically following that similar strategy, Stanley could go from being down 90% to being up 150% on the year.

This is by far the most aggressive strategy and a lot can go wrong in the process. Stanley could purchase an April spread at where he thinks is a bottom for Apple and Apple could decline further resulting in a loss. If he fails on even one of the trades, it could end in disaster or prolong the recovery period. But if he gets it right, he goes from zero to hero in a year.

Now one can execute the quarterly strategy in one of two ways. One way is to purchase a spread one intends to hold through expiration. For example, if Stanley was sure that Apple would be above $550 in January expiration, he could just buy the $530 - $550 spread and hold it through expiration.

The other way to play the quarter strategy is to bet on the recovery. Remember back in May 2012 when we purchased the $570 - $590 July spreads. That spread was a 5-bagger if held until expiration. But just the recovery from $530 up to $580 caused that spread to double or even triple.

So from perspective, if Stanley thought that Apple would rebound to $600 by this January, he might purchase the January 2013 $580 - $600. Not with the intent to hold it through expiration, but with the intent to play the recovery or rebound. Right now, the $580 - $600 January 2013 spread expiring in 27 days costs $3.95. If Apple just rebounded to $580, that spread would likely double or even triple in value. Stanley would then just sell the spread on the bounce. He wouldn't be forced to hold the spread until expiration.

Notice that each method has its risks. Holding the $530 -$550 has the risk that Apple could bounce and then fall again by expiration. What if Apple rises to $600 by the end of December and then falls back down to $500 by January expiration. The $530 - $500 wouldn't have doubled in value in the period and would have in fact lead to a total loss. The $580 - $600, on the other hand, would have seen a triple just on the bounce itself. It could have been sold on the rebound and the trade is successfully executed. No more risk needed to be taken.

But obviously the $580 - $600 has its risks too. What if Apple never does have a big bounce but manages to bounce enough to close at $550 exactly. The $530 - $550 spread under that circumstance would be successful while the $580 - $600 would have failed for the lack of a big bounce.

Now this strategy is obviously not for everyone. A lot can go wrong and it really depends on risk preference, risk tolerance and time-horizon. But we will give guidance throughout the year next year on what we feel would be optimal entries and exits. We will offer guidance on the timing of this strategy without making specific recommendations for any spreads. We will just say, Apple probably bottomed for the quarter or "Apple will probably bounce to $600 from here by expiration this quarter." Things like that.

I do think that while this strategy has the biggest risks, it does also carry with it the quickest yet still reasonable path to recovery. It's not likely we're playing weeklies here. We're trading expirations that happen over 3-month periods of time and we don't play earnings with this strategy. The strategy works like this. You play January expiration -- which occurs a week before earnings -- go to cash, see what earnings brings and then make a decision during the quarter as to when to purchase April spreads. Maybe Apple goes through that whole 5-week process of topping after earnings and falling to a low point. Then Stanley enters into April spreads which also expiration before earnings. Then he does the same thing for July. If he gets July right, he then goes into January spreads. If he gets that right, lo and behold, he goes from down 90% to up 150% in a year.

An even more aggressive variation of this strategy would be to play January 2013, April 2013, July 2013, October 2013 and January 2014. That would result in 3200% on a compounded basis if each trade resulted in a double. So if Stanley was down 90%, took his 10% he had left over and played the next 5-quarterly expirations successfully, he would go from down 90% to up 320%. He would fully recover and make 3x his original investment in the process. But he would have to get 5 consecutive quarterly expirations right. Get one wrong and it's start all over.

We will give guidance on how to execute this strategy. But again, without giving specific recommendations. It will be through our technical and seasonal analysis that we will offer guidance. After Apple reports earnings and the stock reacts, at some point in the quarter we will say things like "this is probably the low point" or "Apple will probably rebound up to here" or "Apple is very likely to close above XYZ at expiration." Things like that.

But don't have any delusions here. I'm going to make mistakes along the way. In reality, this strategy, is a good one if you have a 50% drawdown maximum set in place. Meaning, if you execute this quarterly strategy, then you have to do so with the understanding that if Apple falls further resulting in a 50% drawdown on the spreads held in the quarter, you have to sell. Why? Because it means you got the quarter wrong and you would use the opportunity to get the next quarter right to get you back to square one. So for example, suppose Stanley buys the January $530 - $550 January spread with his $100k. And he gets the trade right.

He now has $200k. Suppose he buys an April spread and his $200k goes to $400k because April is successful. But then during the July trade, Stanley puts on a July spread with his $400k and that spread draws down to $200k as a result of Apple losing further value. Stanley would need to sell his spread and then skip the July expiration. He would then need to get October right just to get back to $400k. So he would be where he was after getting April right. Then he would need to go on.

Having these maximum drawdown risk limits in place, would make room for error with this strategy. This is a complicated strategy but has the biggest potential for recovery. It is also by far the most aggressive and has the highest likelihood for failure. Obviously, someone who goes the 3-year route has a higher chance of succeeding than one going the quarterly route.

But one going the quarterly route, if successful, will have not only reversed the losses, but manage to actually produce gains in the process. He/she would not only recover, but get to benefit from the opportunity that is "Apple."

5. The One-Year Ultra Aggressive Strategy
Now here is a strategy which could be considered ultra aggressive. Or it could be considered reasonable as well. It's actually in the execution, timing and perspective that could make it relatively conservative or relatively aggressive.

Right now, the Apple January 2014 $900 - $1000 call-spread is trading at $3.50 a contract. At least I saw trades executed at that value on Friday. I also saw it executed at $5.00 and all over the $4's. Now let's think about this strategy.

The $900 - $1000 spread will appreciate faster than all other sub-$1000 January 2014 spreads during a recovery period. Suppose Apple reports blowout earnings and rallies back up to $700 a share sometime in February. If that happened, the January 2014 $900 - $1000 spread would rise to $15.00. Suppose it was bought at $5.00. That would triple the value of that spread. Suppose Apple rallied to $800 a share sometime between now and April in some huge parabolic run. That spread would appreciate to $27-$28. More than 5x the value it is trading at today. If Stanley bought that spread and sold it at $800 a share, his $100k would go up to more than $500k. Stanley could then take his $500k and look to buy a more conservative January spread during the first 18% Apple correction in 2013. Because if Apple does have a parabolic run, it is likely to be followed with an 18% correction at least. During that correction, Stanley could buy a relatively conservative 2-bagger.

For example, did you know that back in May when Apple was at $530 a share, the $500 - $550 call-spread was $20.00. Meaning, if Apple closed out at where it is today, those who bought that spread back in May will have 50% on their money. If Apple ends the year above $550, they make 150%.

If Stanley bought the $900 - $1000 today at $3.50 and sold it at $20.00 and then waited for a correction to buy a more conservative January 2014 spread, he could end-up with a full recovery. And what this strategy does is give Stanley flexibility. He doesn't care when it happens, he's just wants a parabolic rally to happen sometime during the first half of next year. If it happens, then Stanley will be in very good shape. He can sell the $900 - $1000 at probably 5x the value at least and then buy a 2x value spread sometime after a correction.

If Stanley thinks that Apple might make it up to $1000 a share because the sentiment has changed and the earnings are rolling way better than expected and Apple is getting revalued, Stanley could end-up in a situation where he buys a spread at $3.50 and is able to sell it at $100. If he took his $100k and pulled this off, that $100k would be worth $2.85 million. If he bought the spread at $5.00 and sold it at $100, his $100k would appreciate to $2 million. He would have fully recovered and on top of that made 100% on his original investment.

There are multiple ways to play the $900 - $1000. It could be bought to play an eventual parabolic rally or huge recovery rally, or it could be bought and just monitored throughout the year. It's a lets wait and see approach. What if Stanley buys the spread at $3.50 down here and Apple reports $18.00 in EPS in January. All of a sudden, 2013 looks extremely promising and the potential for Apple to run to $1000 by expiration increases dramatically. Especially if Apple sells 50+ million iPhones and offers promising guidance with improving margins. And because the spreads are purchased at such a cheap price ($3.50 - $5.00), it gives tremendous upside potential and limited downside risk. It's being bought when Apple is sitting at a 12 P/E ratio.

So those are the basic strategies for recovery. There is no right or wrong answer here. It depends on each individual preference. Some might like the 3-year time horizon. Some might think the 2-year is a balanced approach. Some might like the two-trade 1-year recovery approach. Others might prefer the more aggressive quarterly or $900 - $1000 spread strategies. We will give guidance for each throughout the year.

Recovery Spread Positions (Legacy Portfolio)
1. The BC 3-Year Recovery Plan Model Portfolio
1. Apple January  2014 $550 - $600 Call-Spread at $18.85 x 53 contracts.
Cash = $95.00

2. The BC 2-Year Recovery Plan Model Portfolio
1. Apple January 2014 $600 - $700 Call-Spread at $24.15 x 40 contracts
Cash = $3,400.00

3. The BC 1-Year Recovery Plan Model Portfolio #2
1. Apple July 2013 $600 - $620 Call-Spread at $4.55 x 210 Contracts
Cash = $4,450.00

4. The BC 1-Year Recovery Plan Model Portfolio #3
1. Apple January 2014 $900 - $1000 Call-Spread @ $2.92 x 342 Contracts
Cash = $136.00

19 responses to “The 2013 – 2014 BC Recovery Plan

  1. Andy, thank you for the weekly update – lots to digest here, but some good plans to consider going forward.

  2. So… are you going to share your opinion on whether we should sell the BC model’s 600-650s right away to enter into one of these strategies? Or does this advice take effect when the official sell call comes down the pike?

  3. Andy | Thx for laying things out. What about those still in the 600/650s? What should they b doing?

    • Do u still think a bounce likely that wud get the 600/650s near break even?

      • I think the $600 – $650 still has a fair fight in it. If Apple forms this double-bottom soon, we could end-up seeing a pretty quick bounce again to $600 which would then create value in the $600 – $650’s. Apple could end-up at $620 at expiration which would cause that spread to break even. I think it’s too cheap down here right now. That’s why we are holding it at this point. We think Apple is going to go the double-bottom route. And with 5-weeks left, that’s more than enough time to get back up to $620 or even higher by expiration.

  4. Andy,
    Thanks for the analysis.
    What happens if AAPL is down to 470 or less in the next few weeks? Any of the above strategies that depended on a Jan 13 launch pad will simply fail. Considering we are starting from only 10% our original capital, wouldn’t it make sense to incorporate some downside protection?

    • It’s strategy dependent. If you are going out to April or further, I think at this point taking a drawdown is fine. If you’re buying 2014’s, taking a drawdown here is worth the upside risk. That’s my opinion.

      Remember when people were speculating that Apple could go to $2000 a share this year when the stock was at $620 in April? Well people speculating that Apple dropping to $470 now are making the same mistakes but to the downside.

      I think the downside is now very very limited.

  5. Andy, thanks for your thoughts on future recovery, many options and combinations. Obviously, the big question for those still holding the 600/650 is to cut losses and roll, or hang in for a recovery this cycle. I personally will hold for some recovery, but I am concerned if we broach $500. It certainly looks like the 505 low will be tested again.

  6. Good summary laying out some alternatives. One thing to add which is my strategy. Stanley could take say $5oK and do the 3 year conservative strategy. And take $50K and do the 1 year bullish strategy. I believe I’m divining my money up based on a 2 strategies…this way if we are way too bullish, my conservative strategy preserves capital or likely makes 150%. Thanks for posting this….good to see some potential game plans…I like that you are laying out concepts and not necessarily all of the exact spreads…let the community figure which one is right for them…much less chance you get blamed if someone loses.

    I am looking very, VERY forward to your EPS estimates for 2013 and as much color and detail as you can provide elucidating how and why you come to these. I wonder if you will also give a conservative EPS, a moderate EPS and bullish EPS as well. Again, I like you giving different levels of predictions and risk and letting us figure out the details. Then as the year moves on we can close out the scenarios not playing out.

    I think it’s good what you are doing and the positive attitude..comes across well. I still think you may need an article explaining how you/we can avoid or preserve more capital and some acknowledgement that this will be discussed each year with some possible strategies to avoid the risk of ruin if we have this correction again at year end.

    I know you are doing your best and giving us your heart and soul…again as much as I’m very critical at times, I do appreciate your sincerity and efforts…and I will try to be as constructive and useful in my comments as possible…thanks for your patience during this highly emotional time. Not easy for you too I’m sure.

    • You highlight something that I have pointed out a few times over the past year.

      That while one cannot pick and choose from a model, because the model is a balanced position, one can freely linearly combine percentage allocations in different models.

      This allows finer adjustment of risk level and gives diversification benefits.

  7. i feel hopeless. this was a 1 year thing for me. no way i can continue aggresively active and keep sane. sorry just don’t understand how we let it go to worthless. please don’t banish me for these comments.

    • The answer is that we kept doing what experience said was right, and Apple kept behaving atypically.

      We are where we are.

      But we are also in a place where, if we were 100% cash, we would be loading up the wagon with hopes of great returns in 2013.

      There is no need to set yourself an artificial recovery target. Andy way clear that that is not appropriate for everybody.

      But think hard before ignoring the forward opportunity presented by current situation.

  8. Thanks for the change of direction. It’s great to see a positive attitude again!
    Thanks too for the multiplicity of plans. Very helpful analysis of alternatives. I look forward to your detailed analysis, esp. re earnings over the next year. EPS forecasts (and an appreciation of their riskiness of the underlying assumptions) will be crucial.
    Like others here, I too am acutely dependent on the fate of the J13 600+ spread. I’m assuming from what you say that there is still a good chance of a rebound to 600 by early Jan, but right now that’s a gamble. Your ongoing thoughts on this will be much appreciated.

  9. Steviei/All, I think the time is past for anguish. The milk is spilled, let’s move forward from here. If anyone needs to submit these type of comments going forward, please type them in, the click the Cancel button instead of the Post button. We’re all in the same boat, these comments waste 500 people’s time, because we need to read a post incase it has value. I appreciate, respect, and feel for us all in this time of pain, but let’s help ourselves by actively eliminating the noise. Good luck to all, I’ve put my boot on, and I’m gonna seriously kick some MM ass the next couple of years — they pissed off the wrong retailer.

  10. Andy,
    Thanks for putting some thought into this. It would be good to have an analysis of the strategy you noted back in Sept: actively trade Apple. I think this has to be the best strategy going forward. Buy below a 13 pe and sell above a 15 pe (or maybe 12.5 and 14.5 now.) In Sept you noted that this way THE way to play Apple going forward. I’m curious if you now disagree with that?

    You mention this strategy a bit in the context of the 900/1000 spread. Could you please discuss the pros and cons of using a spread to trade the high and low pe vs using straight calls? It looks like buying something like the Jan 14 700 call has a slightly lower possibility for gains (vs the 900/1000) if you’re trading it at the high pe range, but a much higher probability of finishing ITM if 2013 turns out to be not such a great year. Slightly less risk, much more protection.


  11. Andy

    Today’s was a superb post. Thank you for hanging in with us.

  12. I agree, a superb post. Time to consider, decide, and act.

Leave a Reply