The iPhone Cometh (AAPL)

By Hans Wagner | June 26, 2007 AAA

The release of Apple's (Nasdaq: AAPL) iPhone is one of the biggest events of the year for many investors. It has the potential to be a "game changing" device. Any investor who bought Apple's stock recently has enjoyed a very nice appreciation, partly due to the anticipation that has built up around the iPhone. The question for investors now is whether they should hold on to the Apple stock, or sell it before the iPhone is released for sale. Let's see if we can help put some perspective on this issue.

iPhone Hype
First of all, the iPhone will be available on June 29, 2007, from the Apple Store and from AT&T Wireless (NYSE: T), formerly Cingular Wireless. The price is $499 for the 4-GB model and $599 for the 8-GB model. Apple intends to make the phone available in Europe in Q4 2007 and in Asia in 2008.

Steve Jobs of Apple stated he expects to sell 10 million iPhones, or 1% of the market, by the end of 2008. Furthermore, Gene Munster, an analyst with Piper Jaffray investment bank, predicts that Apple can potentially sell 45 million iPhones by 2009.

Some believe the iPhone will be the device that the next generation of mobile web users want, a device that handles web pages, video, music and phone calls better than current products.

However, detractors say the iPhone is overpriced and will not play well in the smartphone markets. These people tend to be extensive users of email on their own devices and many analysts do not believe the iPhone will be a viable email device due to the different key board. Others worry about technical glitches that tend to come with new technologies.

There is a lot of hype regarding the iPhone and its impact on Apple's stock. This could be good or bad for investors depending on how well-received the phone is by customers.

Investor's Dilemma
With the big day looming, investors holding Apple stock face a difficult decision. Will the expected sales materialize into actual sales and drive the price of Apple's stock up? Or will iPhone fail to meet expectations and Apple's stock fall? Maybe the old Wall Street axiom "buy on the rumor, sell on the news" should be heeded. If only there were a way to protect you investment on the down side, yet take advantage of any potential move up... Well, it turns out there are several ways.

Investors holding Apple's stock have four options:
1) Hold the stock, and ride out the volatility.
2) Sell the stock and plan to buy back after the price has fallen (assuming expectations are not met).
3) Set a stop-loss order under the current price of Apple.
4) Use options to hedge their position.

Decision Time
With the high volatility expected from Apple's stock, investors need to make a decision on what to do. Just like any investment, you should do your homework and then decide what to do. Keep in mind that "no decision" is still a decision. Let's look at your four options in greater detail.

Option #1 - If you have a long-term view, then holding through the potential fall in the price will not worry you, as you expect the price to climb higher again. Basically, you are ignoring the short-term volatility and expect everything to work out, even if there are a few problems along the way.

Option #2 - Take a traders perspective and sell on, or before the news event takes place. You realize that any negative news is likely to cause a quick selloff. With expectations so high it is very difficult for the price to rise in the near term, even if everything goes well. Besides, if the selloff takes place and you still believe in the long-term prospects of Apple, then you can always buy back your shares at a lower support level.

Option #3 - With this option you could set a stop which is low enough to miss any volatile moves, yet high enough so that you do not lose most of your profit.

Option #4 - Set up a hedge such as an option collar trade. This involves buying a put option at the current price so you are protected against any pullback in the price. A put will increase in value as the underlying stock falls. To capture the profit from the put you will have to buy it back when the price falls to a support level. It is like buying insurance. You could also sell a covered call option to help pay for the put. The downside of the covered call is it will limit the upside on any price appreciation to the strike price of the call.

If you own shares of Apple, this could be a fairly low-risk trade that may provide you higher profit no matter which way Apple stock moves. Just remember the time value and volatility of options can work against you and must be considered in your analysis. (If all of this seemed a bit confusing, check out our Options Basics Tutorial.)

The Bottom Line
When the company of a stock you own is about to encounter a news event that is likely to cause substantial volatility in the price of the stock, investors need to evaluate what they intend to do. The worst thing an investor can do is just hope for the best. There are a number of viable options investors should consider before the event takes place. Investors holding Apple shares should make a thoughtful assessment of the introduction of the iPhone and then take action executing one of the options mentioned.

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