Buying Apple Stock Options

[Oats]

Hi,
I think Apple stock is looking really good right now, considering the products I expect them to have in their pipeline... their PE ratio is only 30! I'd like to place a big bet on Apple, but I don't have that much money to spend...

I have heard of derivatives, which are a type of stock option, but don't understand them very well... I would like to buy stock but only pay for if the stock goes up or down... in other words, rather than buying 10 stock for $60 a piece, I would like to buy 10 derivatives, and then if the stock goes up or down, I only pay (or get paid) the difference for those 10 stocks. Is there any such thing? What is the biggest bet I can make on Apple stock with about $500?

 

[Le Big Mac]

Hi,
I think Apple stock is looking really good right now, considering the products I expect them to have in their pipeline... their PE ratio is only 30! I'd like to place a big bet on Apple, but I don't have that much money to spend...

I have heard of derivatives, which are a type of stock option, but don't understand them very well... I would like to buy stock but only pay for if the stock goes up or down... in other words, rather than buying 10 stock for $60 a piece, I would like to buy 10 derivatives, and then if the stock goes up or down, I only pay (or get paid) the difference for those 10 stocks. Is there any such thing? What is the biggest bet I can make on Apple stock with about $500?

Personally, I would stay away from options if you have to ask this question.

But, there's no easy answer. For example, here are options prices for Apple stock, expiring in October.
http://finance.yahoo.com/q/op?s=AAPL&m=2006-10

For $5/option you could buy a call option at $65/share. If the stock price is above $65 at any point between now and oct. you could exercise the option and collect the difference (or just sell the option). In other words, the option's value will reflect the price of the stock above $65 (roughly). So for $500 you could get essentially the same upside as buying 100 shares of the stock. If, however, the stock stays around $65, you'll lose your entire investment. (if you look at the table of prices, you'll see that for $2.50 you can buy options at a strike price of $75. Same idea--if the price is above $75 you're in teh money, and you have the equivalent of 200 shares of gain).

 

[CanadaRAM]

Options are a way to lose your money much faster.

If you are pressed for time and can't wait around to get hosed, they can be great.

 

[Oats]

For $5/option you could buy a call option at $65/share. If the stock price is above $65 at any point between now and oct. you could exercise the option and collect the difference (or just sell the option). In other words, the option's value will reflect the price of the stock above $65 (roughly). So for $500 you could get essentially the same upside as buying 100 shares of the stock.

Let's say I buy 100 call options at $65/share for $5/option. That costs me $500. AAPL stock is currently around $60.50. Lets say that in a few months the stock hits $65.50. I'm in the money!! I get the upside of buying 100 shares, so the upside (65.50-60.50) x 100 shares = $500. I just paid $500 to make $500. I am obviously missing something here. Perhaps I would rather sell the options for more than $5/option at that point?

Options are a way to lose your money much faster.
If you are pressed for time and can't wait around to get hosed, they can be great.

haha... thats pretty funny. well that is why i am not planning to invest a lot of money... but i would like a bigger risk with bigger potential return... if i lose it all, i will not be heartbroken.

 

[Le Big Mac]

Let's say I buy 100 call options at $65/share for $5/option. That costs me $500. AAPL stock is currently around $60.50. Lets say that in a few months the stock hits $65.50. I'm in the money!! I get the upside of buying 100 shares, so the upside (65.50-60.50) x 100 shares = $500. I just paid $500 to make $500. I am obviously missing something here. Perhaps I would rather sell the options for more than $5/option at that point?


.

First off, your math is wrong. If the stock goes to $65.50, you will be up 50c (65.50-65). The option gives you the right to buy the shares for $65, which you could sell for 50c more (or you could sell the option for 50c). So your gain is $50, not $500 (still, a 10% return in 4 months isn't bad, although not much better than if you bought the shares and took the $5 appreciation).

You're leveraging your money with options. The best predictor of future price is current price. The market expects Apple to be worth $60.50 now and in 6 months (if it expected it to be worth more then, the price would go up to close to that amount). So right now you're paying $5 for something that most people consider worthless. It's buying a lottery ticket, or betting on a horse. It has some chance of a payoff, but it's not guarantee.

So, what you're missing is that there's good chance (in teh market's assessment) that Apple will be less than $65 dollars between now and Oct. 15 (when the options expire). If the market is right, you lose your entire investment. And there's a good chance of it. And unless the stock goes significantly above $65, you're not getting much of a payoff.

 

[fatties]

from what i've heard its difficult to buy into apple stock... not sure about stock options though...

 

[Le Big Mac]

from what i've heard its difficult to buy into apple stock... not sure about stock options though...

how is it difficult? It's readily sold on the NASDAQ exchange. Not saying $60/share is cheap. But if you have the money, you can buy as much as you want, immediately, with a call to your broier.

 

[Oats]

hmm.. seems like it would be a better idea for me to buy options for stock price of 40.00, at $22/option. that way, if the stock goes up, i can capitalize, and if the stock goes down, i can still exercise my options at $40, sell them at the current rate, and my losses would be much less.

 

[gman71882]

What etrade or online finacial institutions have the best / cheapest fees?
What is a good rate?
Is it just a percentage charge based on what you buy or is it a flat fee?

 

[tristan]

Brokerages won't even let you trade options unless you qualify as a fairly sophisticated investor with a significant net worth. Personally, I would say that if you don't have an MBA and can't read a financial statement like a book, you shouldn't be in the market. Remember, you're competing against people who did go to top schools and buy & sell options every day.

So unless you forgot to post the year you graduated from Wharton, I would say that you don't belong in the market. And no, 30 is *not* a good P/E. Get yourself into an index fund or ETF, and don't even think of buying an option unless you know what delta is.

 

[Oats]

So unless you forgot to post the year you graduated from Wharton, I would say that you don't belong in the market. And no, 30 is *not* a good P/E. Get yourself into an index fund or ETF, and don't even think of buying an option unless you know what delta is.

i know a bit more than i probably come across as... i'm not expecting apple to jump in the short short term, but in the next 2 years more like. PE of an average company seems to be around 18 or 20, PE of 30 says to me that people expect this company to increase earnings by 50% over the next few years or so. i think apple can do better than that, and i think the stock price will go up over the next few years. i'd expect apple to maintain a PE above 20 for several more years at least.

also, i'm looking to gamble a bit with this investment, maybe learn a few things, not make a living out of it.

 

[tristan]

You want to buy deep in the money calls (LEAPs) then and roll them over every year, that's the only way you can get a leveraged position to go across multiple years. Buy the 1/08 @ 40 calls and then roll them over every december to a later expiration (which costs you money, of course). You're betting that Apple beats the interest you're charged on your borrowed money.

By the way, I hope you know that Apple's revenue, net income, and profit margin *declined* last quarter, and that even if the company does grow earnings to 50% (say $3 a share) but the P/E compresses to a more reasonable 22 or so, then you'll make barely 10%. If Apple misses expectations, it could easily be another Dell (down 30% for the year). And the market is so skittish right now that a minor earnings slip could be severely punished. (Look at MSFT recently.)

I know you like the company, but you can't make investment decisions based on that - they have to be based on fundamentals. I'm sure all the Vonage customer/investors liked their company too. There's no shame in buying an ETF or index fund. Then take your earnings and buy lotto tickets or something.

 

[Le Big Mac]

also, i'm looking to gamble a bit with this investment, maybe learn a few things, not make a living out of it.

I've got a better gamble for you. Send me the $500. If I feel like it, I'll send you back $1000 in a year or so.

Honestly, $500 is not stock market gambling money, it's some savings. Open an IRA or a savings account. Or just spend it on something, like a Mac.