How to play it: Apple surges after stellar results

NEW YORK/CHICAGO Wed Jul 20, 2011 4:47pm EDT

The Apple Inc. logo is seen through raindrops on a window outside of the New York City flagship Apple store in New York, January 18, 2011. REUTERS/Mike Segar

The Apple Inc. logo is seen through raindrops on a window outside of the New York City flagship Apple store in New York, January 18, 2011.

Credit: Reuters/Mike Segar

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NEW YORK/CHICAGO (Reuters) - Apple Inc's stellar quarterly results trounced Wall Street expectations and sent the company's shares up more than 5 percent on Wednesday. The iPhone maker said revenue nearly doubled in its fiscal third quarter.

The question: What's the best way to take advantage of Apple's climb and is there any downside?

BUY APPLE STOCKS

The number one way to benefit from Apple's momentum is to buy the company's shares and hold onto them for at least two years, said Steve Coleman, a portfolio manager with Daedalus Capital who has owned Apple stock for seven years.

"It's dirt cheap and its prospects are fabulous," Coleman said. "I think it's its own asset class and its own store of value."

Apple shares' record high of $396.27 hit on Wednesday marked a more than 20 percent gain from the start of the year and a more than 50 percent rise from a year ago to date. But given the high profile of Apple and company CEO Steve Jobs -- who has been on leave since January for undisclosed medical reasons -- the stock is also susceptible to short-term market swings.

"If something happens to Steve Jobs tomorrow, the stock may go down 50 bucks, so you have to be careful and have it in moderation," said Gary Bradshaw, a portfolio manager at Hodges Capital Management, who recommends starting with a 5 percent position. "There are always things that could trip them up."

The stock has also benefited from the bullish sentiment in the tech sector after International Business Machines Corp, a bellwether for the industry, delivered strong earnings earlier this week. The S&P information technology index jumped 2.7 percent, the best performing sector, on Tuesday.

Ticonderoga Securities raised its 12-month price target for Apple to $666 from $612 on Wednesday, citing the combination of Apple's inexpensive valuation and momentum.

APPLE SUPPLIER STOCKS

While suppliers may benefit down the line from Apple's business growth, many of these companies are not necessarily known because Apple makes it a point not to disclose names.

As a consequence, there is not as much certainty over to what extent Apple suppliers are poised to benefit from Apple's profit climb. Even among the known suppliers, their stock will not necessarily jump in tandem with Apple's because of additional factors like individual company earnings or announcements.

Cirrus Logic and OmniVision Technologies are two Apple suppliers that have benefited from Apple's upswing. Cirrus shares closed up 4.4 percent on Wednesday, while OmniVision shares rose 3.3 percent.

"The suppliers will definitely benefit," said Bradshaw, who owns both Cirrus and OmniVision and calls them "top positions."

Among other known Apple providers, shares of semiconductor provider Marvell fell 0.7 percent on Wednesday, while digital wireless product maker Qualcomm shares were up 0.6 percent and chip maker Intel Corp shares were down 0.3 percent. APPLE OPTIONS

Apple shares have been a winning bet for a long time but with the stock nearing $400 some option strategists suggest investors could look to minimize their risk by betting on more gains, only not exorbitant ones.

Assuming a stock will only rally a little bit is not normal for someone who only invests in stocks. But for investors who use the options market, it's a common occurrence, says Steve Place, a founder of options analytics firm InvestingWithOptions in Mobile, Alabama.

The way to put on trades like this is not easy -- it takes a bit of knowledge about how options work. Unlike a stock, options have other components that influence pricing, one of which is time decay -- an erosion of the options premium as it nears expiration.

One trade suggested by Place is a so-called "iron butterfly" strategy. He recommends the September Apple options contracts to implement this strategy. The iron butterfly is a short volatility bet and has a limited risk, limited reward that makes money if the stock stays around a certain price of the investor's choosing, said Place.

This trade involves selling a straddle -- that is, selling a put option and a call option at the same strike price and expiration date. For instance, selling a call at a $400 strike price and selling a put with the same strike price -- that is a bet against volatility.

The next step is to buy a "strangle," which involves buying a call and a put with two different strike prices -- both out-of-the-money -- with the same expiration date.

Adding a strangle would limit the risk of a strong move in the underlying shares. The bet makes money if the stock remains close to the strike price of the straddle -- such as $400. (Reporting by Ashley Lau in New York and Doris Frankel in Chicago; Editing by Chris Sanders and Leslie Adler)

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