Apple is on the verge of experiencing a significant surge in iPhone upgrades. The company is set to unveil its latest iteration next month, with the AI-powered iPhone 17 launch predicted to trigger a substantial period of expansion in the coming year.
Boasting over two billion active devices worldwide and the introduction of Apple Intelligence, fresh and promising avenues for monetization are emerging. Through a collaboration with OpenAI, Apple’s latest iPhones will smoothly incorporate ChatGPT, empowering users to write with improved linguistic skills, generate impressive visuals, and interact with a more advanced Siri.
The Zacks Rundown
Earlier this week, Apple’s CEO, Tim Cook, stood alongside President Trump at the White House to reveal a fresh $100 billion commitment to American manufacturing. This announcement comes after Apple’s prior pledge to invest $500 billion in the United States over the coming four years, a move made as the company aims to circumvent significant tariffs on its goods.
Apple’s stock price picked up speed, trading heavily after the announcement. The shares, which Zacks Investment Research currently rates as a “Hold,” are starting to show signs of doing better than the market, after underperforming for a large portion of the year.
This company belongs to the Zacks Computer – Micro Computers industry, which is in the upper 40% of over 250 industries ranked by Zacks. Given its high ranking, we anticipate this industry group will perform better than the overall market in the coming 3 to 6 months.
The industry also exhibits promising qualities, as detailed in the following points.
Picture courtesy of Zacks Investment Research.
Studies of historical data indicate that roughly 50% of a stock’s price increase can be attributed to the industry it belongs to. As a matter of fact, the top-rated 50% of industries according to Zacks Ranking perform more than twice as well as the bottom-rated 50%.
Options offer flexibility in capitalizing on potential upward market trends, allowing us to customize our approach based on the existing market conditions.
Option Essentials
Before diving into today’s trading activity, let’s quickly go over some basic option principles to refresh our understanding. Don’t be concerned about having to deal with intricate mathematical formulas or equations. In my experience, the more intricate a trading strategy, the less likely it is to be successful in the long term.
Options are uniform agreements granting the purchaser the entitlement, but not the requirement, to either buy or sell the associated stock at a predetermined price, referred to as the strike price. A call option provides the holder with the entitlement to purchase a specific security, whereas a put option grants the holder the entitlement to sell that same security. The individual who buys an option, be it a put or a call, is known as the option buyer, and the individual who sells a put or call is known as the seller or writer.
These agreements are in effect for a defined duration, concluding on their expiration date. Options are available with weekly, monthly, and even longer-term LEAPS expirations, extending beyond one year.
1. Options are priced based on their time value and intrinsic value. 2. In-the-money options have both time and intrinsic value. 3. At-the-money and out-of-the-money options only have time value. 4. When options expire, they lose all of their time value.
We will now delve into a strategy involving the acquisition of call options.
Multiply Your Apple Returns
Apple’s stock, AAPL, seems to be starting a fresh upward price movement, making it a potentially smart choice for buying call options. Options trading, when executed well, can offer substantial profit potential while keeping risk manageable.
In today’s trade, we’re going to target the September 19th expiration date and the 180-strike price. Purchasing this option gives us the right, but not the obligation, to buy 100 shares of AAPL stock at $180 on or before September 19th, which is a bit over 1 month from now.
The table below displays the risk/reward profile for this trade. Apple stock is currently trading at $220.55 (orange box). We are purchasing 1 September 19 180-strike call at 41.6 points, which is the option premium. Since options account for 100 shares of the underlying stock, the total cost for this call option trade is $4,160 as we can see in the yellow highlighted box.
Image Source: Zacks Investment Research
The top (blue) row shows the performance of Apple stock based on different percentage scenarios at expiration. The bottom (purple) row shows the corresponding percentage return for our call option trade. We can see that if Apple remains flat, this trade would encounter a minor loss of 2.5%. If Apple moves up 5%, this trade will realize a 24% profit. If AAPL advances 15%, we would realize a 77% profit.
This illustration shows the inherent leverage that options provide. A stock investor who bought 100 shares of AAPL would have to contribute $22,055, which is a much bigger investment. A 15% increase in the stock price would yield a $3,308 profit.
On the other hand, in this example the option trader only needs to contribute $4,160 to control the same amount of underlying AAPL shares. A 15% move in AAPL stock would net a $3,203 option profit – a nearly identical profit amount with only about one-fifth of the investment!
Also note that this option contains relatively little time value. The 1.05 points worth of time value (red box) equate to just 0.5% of the underlying stock price. A good way to manage risk when buying call options is to minimize time value and maximize intrinsic value, as time value decays rapidly in the days leading up to option expiration.
Bottom Line
With Apple Intelligence powering the next generation of iPhones, the stage is now set for Apple to experience an outsized bullish run. Apple could very well be in store for a period of outperformance.
A great way to take advantage of this move is via low-risk call options. This allows us to leverage Apple stock returns with the power of options. Be sure to keep track of how AAPL stock performs heading into the upcoming iPhone announcement.
This article originally published on Zacks Investment Research (Alpine Times).
