Closing Put Spread on Apple at open for 10 fold return and buying Apple @ $440

We posted our trade in Apple on the 27 Dec per the strategy here (Link – http://www.spreadbetmagazine.com/blog/apple-shares-complete-the-dead-cross-sbm-makes-them-a-tradin.html) –  Long Apple @ $533 (66% of position size) with a Feb $490 v $440 1 x 2 Put Spread running – net cost $4. Added to long position @ $508 – 27 Dec 2012. 

With the stock likely to open around $450/460 today then we are looking at a 10 fold + return on the option element of this trade to offset the loss on the long stock almost in full. We will close the outright Put spread (1 x 1) and leave the short Put open @ $440, being exceptionally happy to purchase the stock here if put upon given our analysis below. If you’d like to make use of options in your trading to protect your downside then click the image at the bottom of the piece for your free guide.

Here’s a snap shot of the results posted last year showing the sequential growth over the last 3 years. You will note the effective margin compression over the last 12 months.

With the S&P 500 selling for around 14.5 times earnings, Apple, in comparison, is likely to open today around 10 times historic earnings and sit with some $137 billion in cash. Discount that cash and you get a PE of roughly of a shade over 6 times now. The stock is also yielding around 2.5% at this level – not massive, but certainly a better bet than bonds which yield less than 2% and are GUARANTEED to lose you money over the next 10 years. With a cash pile of Apple’s magnitude, that dividend is going only one way – up.

I wouldn’t be surprised too if they do a 10-1 stock split – although theoretically this should have no impact on the stock price, investors en bloc are anything but irrational and I am pretty certain that the stock would rise if a split was carried out.

At $450-$40 Apple shares are a steal to us particularly considering more than a quarter of the company’s market capitalization is in net cash and marketable securities.

Although not growing as fast as the immediate past, analysts still expect over 20% revenue growth in FY2013 and 15% sales increases in FY2014. The stock sports a minuscule five year projected PEG (.50). The stock is now trading at the very bottom of its five year valuation range based on PE, Price to Book and Price Cash Flow. We are in.