One of the habits of many investors in a losing position is searching on the Internet for reasons why their position is still a good stock to own. I find this trait in investors and traders alike.
I have little doubt that there are many Apple investors that have held their shares much longer than they had originally planned to hold, waiting to "get even." If you want to learn more about Behavioral Finance and why you make the investing decisions you do, I suggest you get a copy of a brilliant book titled Behavioral Finance: Understanding the Social, Cognitive and Economic Debates from Wiley Finance, written by Edwin Burton and Sunit Shah. That's as good of a place to understand your money and your mind as any.
I have written previous articles with a focus on behavioral finance, but in this article we are going to focus on Apple, and why I'm not backing away from my optimistic stance. My friend and fellow TheStreet contributor Richard Saintvilus wrote an amusingly titled article I'm Holding Apple Under $400 (and I'm so Ashamed)
I like the way Saintvilus points out the differences between Apple, Microsoft
Best value is another way of saying dirt cheap and Apple shareholders are clearly tired of owning an ever increasingly dirt cheap stock. Tim Cook finger-pointing and disappointment are the hallmarks of many Apple articles.
TheStreet's Rocco Pendola wrote an article that sums up his opinion of Cook's performance as CEO If Apple Bought Twitter It Would Ruin It. I will admit I laughed when I read the title, but I also consider Pendola a friend and laughing was more about Pendola's writing creativity than believing it was true.
Pendola's exceptional creativity aside, Pendola has made it crystal clear he isn't Tim Cook's fan club president. However, Pendola should give credit where credit is due. Apple is not running into the ground; it recently reported one more in a long run of record earnings.
By my last count, Apple sold $54.5 billion worth of goods in the fourth quarter of 2012 while managing to keep $13 billion in its pocket. If that is considered running Apple into the ground, I welcome Tim Cook to take over my household and run my family into the ground at his earliest convenience.
I understand Saintvilus' response of despair. I can think of many more pleasant topics of conversation with friends and peers other than a stock holding that I'm underwater in. Everyone is an "expert" on Apple's stock and the direction the stock has already made.
I'm sure Saintvilus has received his fair share of "experts" telling him why he should have sold at the "obvious exit price" of $705, but I am equally sure Saintvilus has learned to tune most of it out. I, on the other hand, maintain a bullish opinion of Apple, but typically don't own it.
As an active trader, I usually don't position into stocks over $100. My edge diminishes as the price increases much beyond $100 per share. I rely on price movement to gain an advantage, and stocks over $100 don't have the same characteristics as stocks under $60.
After ECN liquidity rebates (I place limit orders for others to trade against), my commissions are essentially free. I can trade 10 times as many shares of a $40 stock back and forth for only pennies as I can with Apple. If you're Goldman Sachs you can trade Apple all day long, but I will take a position selectively if I want to swing trade it or capture option premium.
That is where I am now with Apple. I believe Apple is an excellent candidate to sell put options against further price weakness. If it goes against me, I won't be ashamed of my position or blame Tim Cook. I will accept it as easily as my winning trades. After you allocate your capital, the time to worry is over. Many people worry after they place their order and it's executed, but that's backwards. The worry needs to happen before you press the submit button, not after.
If you do your homework ahead of time and develop a plan of action, there is nothing more to worry about. If the price goes up X amount, you exit. If the price doesn't move X amount within so much time you exit, and finally if the price goes down X amount you exit.
For every investment, you should have four price points as a minimum, and that's if you don't scale in or out. If you scale in and/or out of a position, then you have four conditions instead of price points. With this approach, you eliminate guesswork, emotion and worry.
The first price point/condition is your entry. The other three are your exits, entered at the same time. Emotion is your enemy and will reduce your overall portfolio gains much more than selling a stock at the wrong time because of your investing rules that you stick to.
Here are my rules for selling Apple put option premium. When the trade is over, you will know if I made or lost money. I will sell the May strike because it has about 28 trading days. My primary objective is to capture time decay and four weeks is generally the minimal amount of time that is worthwhile for this strategy.
I want to sell puts instead of covered calls (same thing from a total risk/reward point of view) because it involves one transaction instead of two, and a synthetic covered call (a cash secured put short is a synthetic equivalent to a covered call) should have slightly less premium than a put with a stock that is falling.
My next concern is the strike price. I want to choose a strike that if Apple does fall below, it's likely to recover to (there are other considerations that go beyond the scope of this article). The $350 strike price meets the criteria.
I will sell a May $350 strike price put option for $6.10/contract if able on Friday. I will use a stop loss of $12.20, and a profit target of $2 for the first week, $4 for the second week, and if I hold beyond that, I will want to close out for 10 cents or less. The option expiration date is my hard time limit for the trade.
After placing the trade, I know I have already completed the worry, thought process and method of action. The only thing left to do is watch Rocco Pendola the next time he is on CNBC.
At the time of publication, the author held no positions in any of the stocks mentioned. Follow @RobertWeinstein
This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
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