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Investing with options - Apple Inc - simple option buying strategies
Koen Hoorelbeke
Investment and Options Strategist
Summary: In this article we apply simple option buying strategies in the context of recent market developments concerning Apple Inc. as a case study of principles we learned in our previous "hero to zero" article, in which we illustrated potential investment strategies.
Apple - simple option buying strategies
In a recent article, we explored the fundamentals of buying options, focusing on calls and puts. Today, we apply those principles practically, using Apple Inc. (AAPL) as a case study to illustrate potential investment strategies in the context of recent market developments.
Backdrop
Apple has been on a roller-coaster ride this year, showcasing a remarkable run. However, the recent news of the Chinese authorities restricting the use of iPhones in state-owned and government agencies has cast a shadow over its parade. With China representing a significant market share for Apple, this development can potentially stir the waters. But as we know, with uncertainty comes opportunity.
Important note: the strategies and examples provided in this article are purely for educational purposes. They are intended to assist in shaping your thought process and should not be replicated or implemented without careful consideration. Every investor or trader must conduct their own due diligence and take into account their unique financial situation, risk tolerance, and investment objectives before making any decisions. Remember, investing in the stock market carries risk, and it's crucial to make informed decisions.
1. Bullish Outlook - Call Options
If you subscribe to the "buy the dip" philosophy, this moment might present a golden opportunity to acquire Apple shares at a discounted rate. Dipping your toes in the options pool, one might consider buying a call option as a viable strategy. Let's dissect a potential setup:
Strategy: Buying a call option
- Trade Setup:
- Action: BuyToOpen
- Quantity: 1
- Expiry: 20-Sep-2024
- Strike: 150
- Premium: $40.45 (per share)
- Premium and Risk:
- Premium Cost: $40.45 x 100 (per contract) = $4045
- Max Risk: $4045 (if AAPL is below 150 at expiry)
- Max Reward: Unlimited (sky is the limit as AAPL rises)
- Breakeven Point: $150 (strike) + $40.45 (premium) = $190.45
- Comparison with Buying Stock: Buying the call option allows for leveraging the upward potential while limiting the downside risk to the premium paid. Conversely, buying 100 shares at the current price of $176.43 would require an investment of $17,643, exposing the investor to a higher downside risk but with the benefit of owning the asset outright.
- Why One Year Expiry: The one-year expiry gives the stock ample time to reach its target, shielding the strategy from the rapid time erosion that shorter expiry periods can entail, thus maintaining a favourable risk profile.
2. Bearish Outlook - Put Options
On the flip side, if the recent news has cast a long shadow on your outlook for Apple, envisaging a more significant dip on the horizon, buying a put option could be your strategy of choice. Let's explore a potential setup:
Strategy: Buying a put option
- Trade Setup:
- Action: BuyToOpen
- Quantity: 1
- Expiry: 20-Sep-2024
- Strike: 210
- Premium: $34.95 (per share)
- Premium and Risk:
- Premium Cost: $34.95 x 100 (per contract) = $3495
- Max Risk: $3495 (if AAPL is above 210 at expiry)
- Max Reward: Substantial (increases as AAPL falls, theoretically to a minimum stock price of $0)
- Breakeven Point: $210 (strike) - $34.95 (premium) = $175.05
- Comparison with Buying Stock: Buying the put option shields you from substantial losses, capping the risk at the premium paid, a strategy to potentially hedge a stock portfolio against downturns. Owning the stock, on the other hand, means bracing for possibly steeper declines without such a hedge.
- Why One Year Expiry: Opting for a one-year expiry buffers the strategy against the accelerated depreciation in the option’s value, commonly seen in options with shorter expiry periods, allowing for a more measured approach to navigating market volatilities.
- Trade Setup:
Conclusion
Whether you’re viewing the recent dip as an opportunity to buy or as a signal to hedge against potential further declines, options open up a plethora of strategies to navigate the market's undulating terrains. As always, it is crucial to comprehensively assess the risk and rewards, aligning your strategies with your individual financial goals and risk tolerance.
In the ever-changing landscape of investments, a well-thought-out strategy is your compass. Stay informed and invest wisely.
Related articles:
- September 5th, 2023: From zero to hero - buying options
- August 11th, 2023: Investing with options - Apple Inc - wind down or load up
Options are complex, high-risk products and require knowledge, investment experience and, in many applications, high risk acceptance. We recommend that before you invest in options, you inform yourself well about the operation and risks. In Saxo Bank's Terms of Use you will find more information on this in the Important Information Options, Futures, Margin and Deficit Procedure. You can also consult the Essential Information Document of the option you want to invest in on Saxo Bank's website.
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