There is another good article on Apple at The Street.com titled “Apple: Why you should buy the hype“. We found this article interesting as it discusses two aspects of investing that are, not necessarily polar opposites, but could lead to very different decisions. One is what we call as “investment psychology” or investment strategy and the other is raw data. A quick search within this portal will tell you that we have not been shy in pointing out Apple as a great investment in the last several months.

Suffice it to say that we remain long on Apple and believe that the stock will deliver good returns for the next 3 years at the very least. It is one stock that we recommend investors hold on for the long haul. The math is quite simple. Apple continues to innovate and execute in one of the most consistent manner. If one looks at the raw numbers, the price earnings multiple is currently in line with other similar companies. Note that historically Apple has always commanded a slight premium on the P/E multiple. But let us assume that the P/E will remain the same, the EPS (Earnings Per Share) is expected to grow almost at around 50% year after year. That itself translates into a stock price growth of 50% per year. With that potential, we still consider it as one of the best investments out there.

We are trading call option contracts in Apple (NASDAQ: AAPL) again. Yes, we know there are those that are saying AAPL is overvalued. Yes, we know there are those that say AAPL has gone up too much too fast. But we are skeptical of these experts. We think Apple is still very much a compelling story and cannot be ignored.

First of all, if one looks at AAPL from March 2009, then yes, it has gone up dramatically (over 100%). But if one looks at the recent bull run over the last several weeks, it has been the Financials that have made the run. Apple stock price has languished. We are looking at three catalysts here:

1.   The impending announcement around the tablet PC. This is a well discussed event, but we feel Apple still has the ability to surprise at this event.

2.  Earnings are coming up and we are again betting for upside to the same and an immediate pop in the stock price.

3.  The rumor mills around the change in their accounting system and policy which in turn is expected to lower their P/E ratio. The accounting folks are still working their pencils on this one but we expect them to come to some consensus soon. And when that happens we expect it to be positive for the stock price.

Accordingly we are buying the AAPL April 2010 $250 call option contracts at a premium of $280 per contract. This is a far out of the money contract. But we have time on our hand. And time will tell.

Today we sold our MGM Mirage (NYSE: MGM) February 2010 $11 call options at a gain of 55% within 8 trading days. This is our first trade close of the new year and we are happy to take a profit. This trade has worked out perfectly for us and exactly as planned. We had purchased the call options at a premium of $55 per contract and have sold it at a premium of $85 per contract today.

We are happy to make a gain of course. But we are also happy because we followed through with our overall trading discipline exactly on this trade. We got into the trade after seeing huge trading volume on the stock. We anticipated the reversal of fortunes (at least short-term) for MGM and decided to make the short term call option play. Now that the stock price has gone up modestly, the value of our call options have also appreciated. So, we did not wait even though there is still some time before the options expire. Tomorrow the momentum may take the stock price higher and perhaps we have left some money at the table. But the important thing is we have booked our profits.

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We are making a Google (NASDAQ: GOOG) call option play on a couple of news items. One is their announcement on Nexus One phone based on their Android OS. The other is our anticipation of good 4th quarter earnings they will announce middle of January. Granted, the Nexus One announcement is probably already baked into the stock price. But we think there is still some room for the stock to run.

There are some good things happening for Google as well. The stock price target recently got upgraded to $810 by FBR. That is quite big given that the stock price has been on a run lately. In the last 1 month the price has gone from around $585 to $625 which is close to a 7% rise.

There is still speculation in the market as to whether the Google phone will cause any dent in the Apple iPhone sales. We agree with the market that it will not. However, the smart-phone market itself is expanding at a rapid pace and that fact alone provides some market to Google. And there are strong predictions for mobile search to take off in the next 1 – 3 years which again spells good for Google. The bottom-line for Google is that it is not a negative to have the phone. And their bread and butter business of search is intact.

We are entering into a short term out-of-the-money trade by buying the February 2010 $700 call options at a premium of $320 per contract. This means that we would need the stock price to go up over 10% to be on-the-money. However, our expectations are for a modest gain of around 50% in the contract premium at which point we will sell the call options and get out of the trade. Our expected holding period on this trade is under 4 weeks.

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We are selling half of our Walt Disney Co. (NYSE: DIS) call options for a gain of 67% in just over 2 months. These are our January 2010 DIS $30 call options that we had purchased at a premium of $150 per contract. We are selling half of our portions to manage risk here. On one hand the Disney stock price has been on a bit of a roll lately. On the other hand, we are getting close to the call options expiration and do not want to carry too much risk coming close to that date.

Disney has been in the news lately with their Marvel acquisition among other positive signs. We still think that the stock has legs. It is hovering at around its 52-week at this time and has gone up over 20% in the last 3 months. It has a forward P/E of under 15 which makes it an attractive buy. We will be revisiting Disney for future trades.

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Our immediate target for Netflix (NASDAQ: NFLX) call options was reached late yesterday. We decided to take profits on half of our holdings for a gain of 100% within the same day of purchase. That means the balance holding is free of cost to us as we have already recovered our total cost by selling half the portion.

Our entry price on the January 2010 $60 call options was $45 per contract. We sold half of the contracts at a premium of $90 per contract giving us our 100% gain. In the last 5 trading days, the stock price has gone up nicely from around $53.5 to trade at around $57 at the time of this writing. We usually do not tend to hold on to a trade after it has reached our target. But this time we see good momentum in the stock price and feel we can let it run for a little while longer. Plus the chatter on a takeover is increasing.

Reed Hastings is smiling and so are we.

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We are making a short  term call option move on MGM Mirage (NYSE: MGM). The stock price has been tremendously depressed and, looking at the call option buying action, seems like it is on a bounce back. The fundamentals of this casino company are not great and with a recession behind us the company has suffered. But just as all good things come to an end, all bad things also come to an end. The stock is down from its 52-week high of over $16 to around $9 at the time of this writing. A comparative chart analysis of the last 3 months with the S&P500 is given below.

But the biggest catalyst for our move is the fact that call option volumes went through the roof yesterday. One thing we have learnt from te market is to follow its trend. Do not fight it. For trading and making short term plays, that can be very profitable.

So, we are buying the February 2010 $11 call options at a premium of $55 per contract. Why did we select this call option? It gives us a little extra time for the trade to play out. The open interest on this call option is quite high (around 8,000 contracts) and that means we are assured of some trading in the option. Thirdly, the stock price is hovering around the $9.5 range. Even though, from a percentage perspective, we are expecting a stock price increase of over 10% in around 6 weeks, it seems like a reasonable figure.

Our expectation, as usual, is to generate a gain of 100% on the contract premium.

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There is considerable chatter in the options market about Netflix (NASDAQ: NFLX), the online DVD rental company. The traders are looking at a uptick on NFLX as seen in the options activity. Huge trading volume was seen in the January $60 call options which are still around $6 out-of-the-money. So NFLX would have to go up by around 10% between now and January 16, 2010 for these traders to be in the positive with their options.

However we do not, for a moment, think that traders are looking to keep the trade till the expiration. There is some speculation that Amazon (NASDAQ: AMZN) may make a bid for Netflix. That surely is a huge catalyst for a quick uptick in the stock price. The question is whether something will happen before January expiration. We are going to bet that it will. We are buying the NFLX January 2010 $60 call options at a premium of $45 per contract. Our target is for the premium to double and we will be out of the trade.

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We are making another speculative trade (perhaps the last one for 2009) in Macys (NYSE: M). This is again a cheap speculative play thinking ahead of the holiday shopping season. We are buying the January 2010 $20 call options at a premium of $20 per contract. Yes, this one is really cheap but we also have very limited time for the stock to move. It’s current price is just a shade under $17. So, it will have to move around $3 very quickly for us to make any money on this trade. That is over 15% from its current price. So, it is a very speculative trade. But the amount of risk is low and we think the risk reward profile of this trade makes it quite a compelling trade to make. Let us see how compelling the gains turn out to be.

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We are making a cheap highly speculative play in Charles Schwab (NASDAQ: SCHW) by buying the March 2010 $20 call options. We say cheap because the premium we are paying is only $40 per contract. We say speculative because the stock price is currently at around $17 and we need it to go up over $20.40 to make any money on this trade.

However, our expectation is for SCHW to trade higher (around the $19) range by mid January 2010 and we will sell the call options at a higher premium. Like we said earlier, it is a speculative trade. But the risk is low and upside potential is very high. This may be one of our last 2009 plays that we are hoping will jump-start our 2010 returns portfolio.

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