Apple's (AAPL) stock has been on fire the last couple of weeks, moving from $500 to $600. The product release was as expected, iPad with improvements. Right? The excitement that surrounds new product release events for AAPL is historic dating back to its first release of the Macintosh. So why does the idea of investing in this stock during this move feel like I am chasing?
Even as I am still long AAPL, the idea of hanging on to my bullish position feels like I should be taking profits, yet the stock continues to power higher. The market as a whole feels overbought. The situation in Europe looks to be pacified for now. Right? These types of concerns often plague investors and cause them to make poor investing decisions because they are relying on hunches and feelings to make investment decisions. This is a common mistake, but a costly mistake that many investors starting their investing journey make.
The price tag of AAPL scares many investors away from chasing this behemoth of a company. Who can afford to drop $60,000 into this company to buy just 100 shares?
Okay, there are a few of us who can afford to do this, but obviously eliminates many of us from the game. So, if I am one of those investors who is wary of chasing this monster, where do I look for opportunity if I can’t afford AAPL? The typical response that is offered to this question is to invest in one of the suppliers or partners that help make the Apple product experience work. Qualcomm (QCOM), AT&T (T), Verizon (VZ), Nuance Communications (NUAN) and Broadcom (BRCM) are examples of these opportunities.
Another path that I like to use when trying to invest in a high-priced stock is to use the leverage of options. The leverage of options allows you to control the same shares, but do it for a fraction of the cost. A call option is an instrument that allows the buyer of that call option to buy the equity at a set price within a pre-determined time frame.
For example, if I buy a July 580 call option, I will have the right to buy the stock for $580 on or before the third Friday in July. The cost of this option is currently about $45 per share, instead of $588 to purchase the stock. If the stock moves to $700 by July, the call option would be worth at least $120 per share. This would represent a nearly 200% ROI, compared to a roughly 20% move in the stock. This power of leverage is a great tool for investors looking to trade high flyers like AAPL. Call options allow an investor to control the stock without actual ownership. This option is the first step in understanding the world that options trading can open to the investor.
Caution in the market is warranted, even in the face of this bullish run.
For many investors, they mistake caution with being in cash. Cash does nothing for you. Cash allows me to sleep at night without the fear of losing money, but cash does not help me sleep at night knowing that my money is working.
Using leverage can help increase results, but it can also increase risk if you don’t understand the risk associated with the trade.
At OptionsAnimal, we specialize in teaching people about risk management associated with these types of trades as well as the opportunity that abounds in the market every day.