Apple's (NASDAQ:AAPL) rapid descent from its all-time high has some investors panicking over their losses and others licking their chops, wondering what would be a great entry price.
My personal perspective with Apple at $430.47 as of this writing is that Apple is:
- Too expensive to be a cigar butt or other form of deep-value pick,
- trading about where it should be if it were a stagnant, no-growth company, and
- facing strong competitive headwinds in industries that it, until recently, completely dominated.
As a result, I'm not buying, but may reconsider if its shares fall farther. Given what's publicly known right now, $350 a share seems like a reasonable price for me to be willing to pay for Apple's stock. That estimate takes into account both the new competitive risks it faces and the reality that its balance sheet and operations still remain incredibly solid.
Another way to potentially buy
If you've got a bit more cash to allocate to Apple than I do, though, there are other options open to you if you're interested in buying stock but think its shares are still too pricy. There are even ways available now to potentially buy its shares below that $350 mark.
If you write (sell) what's known as a cash-secured put option, you agree to be obligated to buy the company's stock at a predetermined price, on or before a predetermined date. As of this writing, the Apple January 2015 $420 puts have a bid price of $73.70 and an ask price of $75.50. If you were to write those puts, you would receive around $73.70 per stub. If those shares were to be put to you, your net price to buy Apple's stock would be around $346.30 per share.
What's the catch?
Of course, there's no such thing as a free lunch, and that holds true for this type of options investing. For one thing, options are traded in 100 share increments. To open the position, you'd need to be willing to dedicate nearly $35,000 of your own cash (plus the premium you received from writing the option) to an Apple investment.
For another thing, writing the option obligates you to buy Apple's stock at $420 a share at any time between when you write the option and options expiration in January 2015. Unless you buy back those options before expiration, your obligation to buy at $420 remains even if Apple's stock drops well below that level. Also -- the options buyer -- the person on the other side of that trade -- has the right to pick whether or when to exercise that option and require you to buy.
And finally, if Apple reverses its slide and starts rising again, you won't see a dime of that growth (or any of Apple's dividends) from your position, unless the shares get put to you first. You would, however, get to keep the premium you received for writing the option in the first place -- a nice consolation prize, but cold comfort if the stock once again retests its highs.
Fool contributor Chuck Saletta has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.