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An Alpha Play on Apple
12/05/2012 8:00 am EST
With companies such as Costco, Whole Foods Market, and Las Vegas Sands declaring special dividends in an effort to beat the taxman should we fall off the fiscal cliff, it is natural for speculation to turn to AAPL, a favorite underlying of many options traders, including Mark Sebastian of OptionPit.com.
I recently wrote an article for TheStreet pointing out the list of companies I think could be next in line for a special dividend. On that list was ORCL, who just announced after the bell that theirs could be a special dividend. The companies I looked for were super stable, high-market cap, low P/E, and loaded with cash. Naturally, at the top of my list: AAPL.
Take a look at how much cash per share the company is currently holding. It is an incredible amount of money that the company has on hand, and it represents a big portion of the stock's value. I think, as a company that is printing money right now, it is borderline irresponsible for the firm not to have some sort of special dividend.
So, one might argue that traders should buy AAPL, if not for the special dividend, for the speculation that there might be a special dividend. However, one might also argue that there are good reasons not to buy AAPL. The stock is pressing against its 200 DMA, and the IV is somewhat high. To make matters worse, there’s the fiscal cliff.
I would argue that a catalyst for a company like AAPL to break back above its major averages and see its IV drop, would be for the company to do something with some of the cash on hand.
However, the fiscal cliff is a bit scary. All stocks have a tendency to correlate, especially when the markets tank. So, while I think one might consider collaring AAPL, the cost of the put seems a little high right now.
With the VIX barely above 16, one could set up what's called an alpha play. The trader goes long AAPL and, maybe, some of the other stocks that are on my scan list, and then one hedges it by using SPX options instead of using the underlying equity options. The trader is creating alpha by not betting that the market will go up, but by betting that companies with lots of cash on hand are going to outperform in the near term.
I would look to use the December expiration, because I do believe that all of the dividend announcements will be made before the regular December expiration. One could set the collar just below the 200 DMA, say 1370 or so, and then set the upside of the collar in the 1450 range.
By Mark Sebastian of OptionPit.com
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