This post will describe our AAPL Stock Replacement Strategy and model out several options of consideration (for Member's risk appetite) and more specifically, showcase the chosen model that BotTrigger will be placing for this trade-setup. In short, the theme of this trade is the following: When AAPL pulls back sufficiently, or dramatically for that matter, we will sell our AAPL shares and rotate that capital into a conservative Call Spread that has far greater upside yield than owning the stock, with the goal of doubling our ROI (return on investment) on the trade to 100% or more.
To understand how Call Spreads work, please review our prior post here https://goo.gl/pHIAkJ
But, conditions need to be right for us to do this. We need to wait for AAPL to pullback on some kind of overreaction or capitulation bottom that causes a massive discount to premiums in the options market. Only when premiums are getting poleaxed will we consider initiating the trade to sell our shares at those lows in lieu of buying a higher yielding Call Spread.
We'll be watching for some kind of gross overreaction from the market on AAPL, whether it be from an earnings drop/pullback or any number of media reports & talking heads that come talking about how the iPhone growth story is over or chip manufacturing orders are down or the iPhone 7 adoption is a dozy, etc...causing the stock to pull back like we've seen on a number of AAPL bear raids. One things is certain about the AAPL narrative and that is the collusion of forces that will always exist to drive sentiment/price higher and lower. The media stories on AAPL is a whole media business/industry in upon itself. We're not going to discuss the hype around such market forces but we will discuss how to take advantage of gross over-reactions. You can be certain that AAPL optimism & bullishness doesn't last forever. In every rally there are instances all along AAPL's chart that show dramatic pullbacks of all kinds & colors. What we want to watch for is that next buying opportunity. We got a massive one back on September 9 when AAPL's stock went from $110 to $102. Our GTC (good to cancel) limit order was filled @ $5 on the March $100/$110 call spread. A trade that stands to yield 100% so long as AAPL stays at $110 or higher by March expiration. Our entry couldn't have been more timely.
So, we will be looking take advantage of another meaningful pullback on AAPL from now till January earnings. Note, BotTrigger is not saying we will get such a dramatic pullback but we are scouting the trade opportunity for all of us should it come. This post should not be taken to mean that anyone should sell their AAPL and try to catch it lower. AAPL is very much in a whole new seasonal Bull cycle and we expect this to trade far north of $150 by mid next year. We will forecast a price analysis in another piece.
In a classic Stock Replacement Strategy, the intent is largely to "mirror" the price appreciation of what the stock's share price journey would have done by using certain derivative assets at a fraction of the cost. The attraction is to not only mirror the price performance of what AAPL stock would do, but to do so at a fraction of the cost and thereby free up extra cash that would have otherwise been tied up into the stock. This is done largely by using the following:
Deep in the Money Calls
An example of a stock replacement strategy would be to buy deep in-the-money options. The delta of which is close to 1, which means that the option will increase by $1 for every favorable $1 move in the underlying security. This allows you to have the same type of exposure to a stock for a lower cost than having to buy the shares.
Vertical Call Spread (Bull Spreads)
Here, BotTrigger will take a different approach and will seek to far outperform the general price appreciation of the stock and will be doing so with all the capital proceeds from our sale at the lows. So when we sell our shares, we will be rotating that entire capital into a high yielding call spread. Our goal is to put on a conservative trade that will pay more than double by expiration.
Of the 2 derivative assets mentioned above, we will be using the Vertical Call Spread instead of a Deep in the Money Call.
Furthermore, the stock replacement strategy needs to be understood from a framework of some distinction first off. In order to justify the stock replacement strategy, the trade should appreciate at not only the equivalent value of the stocks appreciation but also exceed it to account for any dividend reimbursements forgoed and any tax implication on selling your shares. So do keep in mind that if you sell your shares to get into this trade, then you would be giving up on your AAPL issued dividend and as mentioned, the tax implications of selling your shares are another point to adjust for.
This is why we have scouted a trade setup that will far exceed both the opportunity cost of the lost dividend and tax implication of selling our AAPL shares. So it's not enough to just "mirror" the stock's price appreciation. We need to exceed it for it to be worth it. What's more, we will only take this trade if the market gives us an absurd discount due to some kind of massive breakdown in the near-term or intermediate-term trend. For example, if we get a dramatic drop where AAPL pulls back 5% to 7% on earnings on some kind of gross over-reaction, then we will sell our shares near the lows and rotate that entire capital into a very conservative call spread.
The following Call Spreads should be good positions to consider in the event of a massive pricing discount in the options market: We've scouted some to consider, from the more aggressive to the ultra conservative positions. Notice the 2018 & 2019 plays are really only if you're actually bearish on AAPL. They are definitely for an ultra conservative investor.
Of the positions shown above, BotTrigger will specifically be taking the November 2017 110/120 call spread (highlighted in yellow) looking to get filled @ anywhere from $3.50 to $4. This has a max spread of $10. If we were filled @ $4 then the max gain that can be achieved on this spread is a 150% gain so long as AAPL closes at $120 by November expiration. If we were to get filled @ $3.50 then the max gain is 185%. So we may adjust our placement of the trade but our minimum goal is to get filled @ $4.
For AAPL to travel from $113 to $120 in a year is pretty much a foregone conclusion that we are certain will happen. We think that's very reasonable.
This level of conservatism is only being considered because we intend to use the total proceeds from selling our shares to rotate the entire allocation to this call spread. Therefore, we want utmost peace of mind since this is a big chunk of the portfolio at now more than 10%. Also note, it is far more likely that AAPL will be trading well above $150 by middle of 2017. And we will be taking advantage of AAPL price journey all along the way in other more aggressive spreads, howbeit these will be much smaller allocation sizes then the ones in this post.
Take a look at how we forecasted AAPL coming out of the 2013 correction. The Bottoming process and eventual Recovery lead to a monster rally that took AAPL all the way up from $55.03 (or $385 pre-split adjusted basis) in April of 2013 to $134.54 by May of 2015. The forecasting analysis was accurate to the dollar. It doesn't always work out so nicely but it did here:
When we apply the same forecasting model to the current breakout of this trend, we get $150 as the low target and $180 as the high target. $180 would most likely occur in 2018 however. So in terms of technical pressure that has been building on the chart, the price for higher is strongly on our side. We will play it how it comes. Until then, our most advantageous position will be to take the path of a more conservative approach. Imagine that the market will be difficult and full of shenanigans. It's imperative that you/we think like that and take nothing for granted.
We will update Members along the way when we see evidence that there may be a good pullback for us to get into. For now, we are in wait mode. If there are adjustments to be made in the actual call spreads then we may increase or decrease our trade parameters, depending on how things play out. But for now this is the base guide we will be using for our entry.