How to Profit From the Apple (AAPL) iBond Announcement
Companies / Corporate Bonds May 02, 2013 - 05:35 PM GMTBy: Investment_U
David Fessler writes: There was big news from Apple this week. And investors are eager to uncover exactly what it means and… most important… how to play the situation. The strategy is simple.
On the latest Apple (Nasdaq: AAPL) earnings call, Tim Cook announced that the existing share buyback program would be increased to $60 billion from the original $10 billion. The company has ample cash flow to support the increase, but Apple chose a different route. It’s diving into the debt market.
In what was the largest offering in history, Apple raised $17 billion through the debt sale. But does this massive amount of debt make Apple less attractive to shareholders?
Not at all.
And here’s why…
The deal was priced at just five basis points above LIBOR at the short end of the yield curve (three-year) and ended the day yielding slightly more than Treasuries. There is a difference of just 20 basis points. Today the three-year Treasury note is trading at 0.30% and Apple bonds trade at 0.32%.
In other words, bond investors believe Apple is nearly as good a credit risk as the federal government!
But the real surprise is at the long end of the curve.
The premium for being locked into Apple for 30 years instead of Treasuries is only 1%. Putting real numbers to work, the 30-year T-Bond trades at 2.83%. And Apple is priced at only 3.83%.
Investors think Apple’s bond issue is a close comparison to U.S. government debt. This is amazing considering that 20 years ago, people said Apple was going out of business!
Putting a Floor Under the Stock Price
For investors this means Apple has put a floor under its share price. Would you want to short the stock knowing that the company could jump into the equities market and create a $10 billion short squeeze at will?
But, even though there is an implied floor, you may not want to chase the stock here.
Considering Apple’s recent lackluster earnings report, the increasing competition from Samsung (OTC: SSNLF) and the possibility that the new iPhone will not be announced until September, the stock could be a value trap.
One way to play this week’s news is to sell covered calls. But a big product announcement could cause a dramatic rally and result in a strategic position being pulled from your account.
Another option is to dollar-cost-average into the position. This would be a good approach if you purchased the stock at a price above today’s and would like to reduce your cost basis.
But there is an even better way to profit from the event…
Get Paid to Name Your Price
If you are simply looking for an investment to capitalize on the hard deck that was created by the increased buyback, you could also sell longer-term puts.
One interesting contract is the January 2014 put with a $400 strike price. As I write this, the contract is selling for $25.95, so the effective share price if the stock was put to you is $374.05, $16 below the recent low of $390.
Since the contracts are out of the money, you would be tying up a relatively small amount of buying power.
For the $400 strikes, the buying power required would be $8,000 (20% x $400 x 100). The upside is $2,590 if the option expires worthless in January – but you must be ready to have the stock put to you if the price drops.
It’s a quick-and-easy way to take advantage of yet another historic move by Apple.
Good investing,
David
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Source: http://www.investmentu.com/2013/May/how-to-profit-from-the-apple-aapl-ibond-announcement.html
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