Mini Options!
For a long time stocks that had a high price per share, like Apple Inc. (NASDAQ:AAPL) were out of reach for those looking to sell options on the stock. Having enough cash to buy 100 shares of Apple Inc. (NASDAQ:AAPL) is no small feat, leaving the average investor out in the cold. To fix this problem, “mini” options were recently introduced for select stocks. A mini option is identical to a normal option except that it is based on 10 shares instead of 100. This allows a small-time investor to sell options on Apple as long as they can buy at least 10 shares.
Apple’s epic fall from grace has already been discussed to death. The stock fell from around $700 to about $445 today after reaching a low of $385. Determining the value of Apple Inc. (NASDAQ:AAPL) is difficult, but there are a few things that can be said. Apple Inc. (NASDAQ:AAPL) has about $152 in net cash per share, and its 2012 free cash flow was roughly $44 per share. This puts the adjusted P/FCF ratio at 6.66.
Now, the pessimism regarding Apple Inc. (NASDAQ:AAPL) is based on uncertainty about future growth. Cheaper Android-based devices are flooding the market, causing Apple’s margins to shrink. Android is quickly becoming the dominant mobile operating system, and new competition from Microsoft’s Windows phone and Research In Motion Ltd (NASDAQ:BBRY) will only make things harder.
Based on current earnings Apple Inc. (NASDAQ:AAPL) is dirt cheap. But since the future is fuzzy in terms of profitability, maybe you want a bit of a lower price. The August $410 mini put option can be sold for $10.45 per share. This would net you $104.50 per contract sold, ten times less than a normal option. Here are the two possible scenarios:
| Scenario | Outcome |
|---|---|
| The stock price is above $410 per share at expiration | The option expires worthless and you are not required to buy any shares. The $104.50 per contract which you received gives you a total return of 2.55% over about 80 days, or 11.5% annualized. You can now sell another set of put options. |
| The stock price falls below $410 per share | You buy 10 shares of AAPL for each contract which you sold. The premium reduces your cost basis to $399.55 per share. You now own the stock which you wanted at a price which you’re happy with. |
The bottom line
Put options can allow you to generate income while you wait for a stock price to fall. This works well if a stock is trading slightly above what you’d like to pay for it, allowing you to set an entry price and get paid to wait.
Note: The premiums used above are accurate as of this writing.
The article Buy These Tech Stocks at Lower Prices originally appeared on Fool.com and is written by Timothy Green.
Timothy Green owns shares of Microsoft and NVIDIA. The Motley Fool recommends Apple and NVIDIA. The Motley Fool owns shares of Apple and Microsoft. Timothy is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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