This is the "rest of the story" I promised you in the Friday update. For the foreseeable future in 2008, I'll be recommending some "Extreme Income" strategies that are based on our fundamental ChangeWave Alliance research.
These are some strategies that income investors can use to play the best names that ChangeWave research uncovers through its extensive survey process -- and they're the best ways we can gain from those discoveries.
Apple Inc. (AAPL) is one of those names and, through the creative world of derivative products, we can be involved by owning the 12% Merrill Lynch Apple Inc. STRIDES (AVN) traded on the NYSE as a way of participating in events that drive the underlying common stock, as the stock's activity directly affects the movement of derivative products like AVN.
Here's how STRIDES work, without getting too involved in the explanation:
STRIDES are made up of a short-term bond that is married to an option strategy. In the case of the Apple STRIDES, they mature on Sept. 4, 2009, or about 18 months out. They carry a 12% coupon that pays 75 cents quarterly, with the next ex-dividend date being Feb. 13.
Does it sound too good to be true? Well, almost. Let's look at an example:
If you put up $10,000 to buy 382 shares of AVN at current prices, the downside to this approach is if Apple stock falls below $133 per share. At that time, you would be "knocked into" the stock, meaning that when the STRIDES mature on Sep. 4, 2009, you would be issued 72 shares of stock instead of getting your $10,000 in cash principal back.
That's the downside and for it to happen, shares of Apple have to fall 28 points, or 17%, from current levels to risk the stock being "put" to you.
The Apple STRIDES traded as high as $27.90 when shares of Apple (AAPL) traded up to $200, and now with the stock back down to $160, I view this as a good way to get into shares of AVN at the low-$26 area and lock in an 11.5% current yield on an 18-month short-term instrument that's tied to the hottest tech company in the world.
How does the Apple STRIDE (AVN) issued at $25, trade up to $27.90 and then back down to $26? That's simple. STRIDES have call features built in and as long as the shares of AAPL trade above $133, they are callable at a higher price than the $25 issuance price.
The first call date is Sept. 5, 2008, at $26.81 per share, followed by subsequent call dates every two weeks after that until maturity. The call price gradually rises with each call date.
For example, if AVN is called on March 31, 2009, you would get $28 per share. Because the stock is trading so deep in-the-money, traders are betting that there is a good chance these will get called somewhere along the way by Merrill Lynch (MER), which issues the STRIDES.
Q4 earnings for Apple are due out today (Tuesday, Jan. 22), and based on ChangeWave's most recent post-holiday PC spending survey, Apple should deliver one whale of a fourth quarter. Check out the latest data from the Alliance.
Past 90 Days: Consumer sales of Apple laptops (17%; up 3-points) and desktops (16%; up 6-points) took an astonishing leap over the holidays. The chart below shows just how dramatic a transformation in market share this represents for Apple.
The most important thing to note is that these are not highly liquid securities, so use limit orders only when entering the position.
If you want to get in on this trade, buy it today before the close, watch for the numbers to come in and let's put on the AVN short-term, fixed-income security with some upside. This is the kind of short-term instrument that I believe will hold up well in such a down market, and provide us with the kind of double-digit income we desire.
There are more than a few ways to skin an Apple and, for our purposes, I really like this opportunity to buy one of our current-favorite investment themes at ChangeWave at a nice discount to where it was trading just a month ago.
Stay tuned and we'll look for the stock to pop tomorrow, Wednesday, Jan. 23.
Bryan Perry
Editor The 25% Cash Machine