Large Cap Tech LEAPS on August 31

The following is a list of the current base prices of AAPL, GOOG, MSFT and a few others for comparison including a possibly interesting play with HPQ as well followed by various January 2014 calls.

The mathematical dissection of which options have the best value compared to expected volatility I don’t think gives much of an incremental advantage in selection.  I’ve chosen for example 100 point increments in the strike prices of similarly priced GOOG and AAPL which demonstrates a bit more expected volatility in Apple than Google.

Apple, Google and Microsoft are in the very unusual situation of having immensely strong technological positions and insane amounts of cash.  Hewlett Packard anyone else with a scent of exposure to the PC market (DELL obviously) is also trading at historically low P/E ratios.  It is hard to imagine situations outside the more dire macroeconomic scenarios where both of these companies emerge as big losers (though a re-elected Obama administration that steps up taxation and doesn’t enable a repatriation of foreign cash holdings is sufficiently dire for them to wildly appreciate.)  The asymetric upside is good growth and increasing P/Es could lead to one or both doubling.

Of the three I would feel most comfortable with GOOG as a buy-and-forget play now which is of course an option.  Their market lock in feels strongest with the most innovative (most productive?  We’ll see) R&D and promising new fields to come.

One another play would simply be to get NASDAQ 100 calls.  The grossly undervalued large caps included the above named as well as CSCO and QCOM add up to approximately 50% of the index, though you get BIDU and WYNN and other plays that are not as salient to the thesis: do you feel lonely in the QQQ, Kraft Foods?   There are a number of companies in the index such as Amazon (3.5% of the index and IMHO grossly overvalued) The QQQ closed at 68.16 today; this idea train has already left the station this year but probably plenty of track ahead:

Chart for PowerShares QQQ (QQQ)

This looks a touch ahead of itself going into a volatile September; still, QQQ Jan 14 LEAPS now:

70 – 5.92

80 – 2.29

90 – 0.63

100 – 0.13

This strategy would have fallen short in companies like Microsoft and Oracle and others in the lost decade of stocks 2002-2012 but as the economy generally picks up and if Europe were to return from the brink would pay off big.  For my current positions short S&P if there is a steep downturn in September I would pull the trigger on a strategy such as this.

The SPX topping out?

Doug Kass at put up two contrasting files showing specific points where lows in the VIX signaled forthcoming drops in the SPX, five times in the last two years.  He was on CNBC with the same message two weeks ago — the market effectively unchanged since then.

Bespoke Investment Group has a compelling chart that the gains of late in large caps have been mostly low volume gains which is technically ominous.

Some “Triple Top” talk evidence seems specious to me — Business Insider cites this as a possible “Triple Top”:

chart of the day, s&p 500 three spikes, august 2012

But had been warning about the same thing in September 2011

s&p futures head and shoulders

In short the S&P does appear posed to this rube technician at a decisive moment which possibly suggests a downward bias, that is also seasonal and will fluctuate with the election.  It is notionally cheap but facing huge European headwinds putting the smaller cap Russells in the unusual position of being a slightly better equity safe haven.  Few ports would be safe in that storm however.

Apple (AAPL) is 5% of the S&P and 13% of the NASDAQ 100 Capitalization-weighted indexes and so a meaningful short term up move (likely) in this one name could pull the entire index higher.

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