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The Case for Owning Apple Through December


Remember: If you're going to buy Apple on this dip, then protect the decision and hedge yourself.


Fall is apple-picking season and it seems to be the same with Apple (AAPL) stock. For each year since 2004, December has posted a higher closing price than October with the exception of 2008. The average of all seven years for this two-month period is an 8% rise in price.

Even though AAPL disappointed Wall Street estimates on October 19 for the quarter ending September 24, net profit was up by 39% year over year at $6.62 billion versus the previous $4.31 billion. Not bad growth while the US economy struggles with 9.1% unemployment.

So is now the time to buy AAPL? If you're a believer in past falls, then perhaps it is. As we strongly state as rule No.1 in Buy and Hedge: The 5 Iron Rules for Investing Over the Long Term: Hedge Every Investment. This means that if you're going to pick AAPL on this dip, then protect the decision and hedge yourself.

A weekly chart of AAPL shows that over the past two years, it seems to find support at the 50-week moving average. Right now that is just over $350 and this is where we want to set our hedge.

Click to enlarge

If you believe that there will be a pullback to the $350 level and want to wait for it to ripen just a bit more, then consider support to be at the $300 level. Again, support is where you would set the hedge.

The easiest way to set hedge for a long stock position is to simply buy a put. A put gives the owner the right to sell their shares at a particular price by a specific date regardless of where it is trading. Think of this as position insurance.

In the case of AAPL, if you were to set your hedge by purchasing a put with a $350 strike price, that means that no matter where AAPL trades, you have the right to sell the shares for $350 before the put expires. In our case, we'll choose the January 2012 expiration period.

Normally we think on much longer terms than two months, but right now options are expensive. Due to the last three months of volatility in the market, insurance like this will cost more. Think of this as buying hurricane insurance (I don't even know if there is such a thing) in Florida between June and November. Not to mention our thesis is that the price will be higher by the end of December, so if we're only looking to hold the position that long, no need insuring it out past that time frame.

We all know AAPL has been the darling stock of the NASDAQ these past two years, and buying high is counterintuitive. But making sure you're hedged will give you the confidence to stick to your convictions, not to mention let you sleep better at night.

Happy hedging!

Click Here to Purchase "Buy and Hedge: The 5 Iron Rules for Investing Over the Long Term" by Jay Pestrichelli and Wayne Ferbert

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No positions in stocks mentioned.
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