Mon Jun 23 2014
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Now May Be the Best Time to Buy Apple in 5 Years, but Wait…

The media storm surrounding’s (NASDAQ: AMZN) Fire Phone this week is detracting attention from the 800-pound gorilla in the room, Apple (NASDAQ: AAPL), and creating an opportunity for those smart enough to seize it. In fact, now may be the best time to buy shares of Apple in the past five years.

I’ve spent the last week researching and commenting on the Amazon Fire release, sector ramifications and best ways to play the news. Contrary to popular belief, Amazon is not getting into the smartphone business to take major market share away from Apple and Google (NASDAQ: GOOG), although I am sure it wouldn’t mind doing so.

The Fire Phone is simply another income generator for Amazon (like the Kindle Fire), helping to drive users to its site and product mix. Sure the 3D display and “stereo” sound are cool, but this is not an iPhone killer by any stretch.

Apple continues to create the most advanced, clean and user-friendly technology, but that’s only part of the story here.

Some scoffed at the recent $ 3 billion Beats acquisition, which is actually considered cheap by many measures. In addition to the fact that Beats produces $ 1.3 billion in sales per year, it gives Apple some much-needed street cred and a talent boost. Beats co-founders Jimmy Iovine and Dr. Dre will both go to work for Apple, and these relationships should prove invaluable as it continues to dominate and expand its streaming and iTunes music businesses.

But the main reason Apple is so attractive right now is the recent stock split. Analysts always cite the fundamentals as a basis for going long AAPL, and the fundamentals are certainly positive. But AAPL is a stock that is largely driven by sentiment and technical momentum.

On June 9, the company completed a seven-for-one stock split, dropping the share price from a close of $ 645.57 on June 6 to the mid-$ 90s. This makes AAPL more accessible to millions of investors and means that the typical run up we see heading into product announcements is likely to be even more pronounced.

Apple’s new iPhone 6 is scheduled to hit the market sometime in August or September. Rumors are running rampant about the design, features and components of the new phone, including the option for a larger sized iPhone and the anticipated iWatch.

The stock is within 10% of  its split-adjusted all-time highs around the $ 100.75 mark. Round numbers tend to provide psychological resistance, but a run to $ 100  seems likely as we approach the iPhone 6 release.

While now may be the best time in the past five years to buy shares of AAPL, there’s an even better way to play the stock’s pre-release momentum. And it could result in 60%-plus profits by the time you can get your hands on the latest iPhone.

AAPL Call Option Trade

Today, I am interested in buying AAPL Oct 90 Calls for a limit price of $ 5.85 or better.

Risk graph courtesy of tradeMONSTER.

This call option has a delta of 57, which means it will move roughly $ 0.57 for every dollar that AAPL moves, but it costs a fraction of the price of the stock.

The trade breaks even at $ 95.85 ($ 90 strike price plus $ 5.85 options premium), which is 5% above current prices.

I am looking for AAPL to run to $ 100 in the next two months, which would equate to at least $ 10 in option premium. We will place our profit target just under that level.

For our stop-loss, we are going to use AAPL’s previous highs coupled with the recent upper gap level of $ 82. A close below that level in the stock would signal it’s time to exit the call option.

Recommended Trade Setup:

– Buy AAPL Oct 90 Calls at $ 5.85 or less
– Set stop-loss to trigger if AAPL closes below $ 82
– Set price target at $ 9.50 for a potential 62% gain in 2-3 months

If you want to take on a little more risk, you could sell three-quarters of your position when the initial target is hit and leave the remainder of the position to run with a target of $ 10.75.

Note: If you followed my June 9 recommendation to buy the DRI Oct 55 Puts at $ 5.90 or less, the $ 7.50 target was hit today when Darden Restaurants (NYSE: DRI) experienced a big drop after issuing disappointing quarterly results. That’s a 27% gain in just 11 days, or even more for those who got in at a better price.

If you have a question or comment about today’s strategy, please send it

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