Apple Stock Is Still Worth 23% More at $265 Per Share - Short Put Strategies Work Here

Apple (AAPL) stock is worth over 23% more at $265 per share based on its strong free cash flow (FCF) and FCF margins. Investors can sell short out-of-the-money AAPL puts to generate income and to set a buy-in target price.

AAPL is at $215.90 in morning trading on Monday, July 1. The stock has been rising since May 2 when it released its fiscal Q2 earnings. The stock was at $169.30 on May 1, so it's up 27.5% in the past two months.

But this does not mean it can't still keep moving higher. I have set a $265 price target based on the company's huge free cash flow (FCF) and FCF margins.

Target Price for AAPL Stock

I discussed the underlying valuation of AAPL stock in a recent Barchart article on June 4: “Apple Stock Could Still Be Undervalued Here Based on Its Powerful Free Cash Flow.” I also discussed its huge share repurchase program in my GuruFocus article on May 23: “Why Apple's $110 Buyback Program Works."

The bottom line is that investors expect Apple will generate at least 27.7% FCF margins, as I pointed out in my latest Barchart article. That means almost 28% of every revenue dollar will go straight into its bank account, with no capex, spending, or cash expense obligations.

The company can use this to pay out dividends and buy back stock. So, for example, analysts now project revenue will reach $414.11 billion next year ending Sept. 2025. So, by multiplying $414.11 billion in revenue by 27.7% results in an FCF estimate of $114.7 billion. On other words, the company could easily buy back $115 billion in stock and/or pay dividends over the next year.

The market likes this. It will likely give the stock at least a 2.8% FCF yield. That means dividing $114.7 billion in FCF by 2.8% produces a potential market cap of over $4 trillion (i.e., $114.7b/0.028 = $4,096 billion).

This is still 24% higher than its market cap on Friday of $3.3 trillion. In other words, AAPL stock is worth 24% more than its price on June 28 of $210.62, or $261.17 per share. And since the company is buying back 2.5% of its shares annually (see my GuruFocus article), the target price is 2.5% higher, or $267.70 per share.

One way to play this is to sell short out-of-the-money (OTM) puts in nearby expiry periods. 

Shorting OTM Puts

Existing shareholders can benefit from this play as it generates extra income every period with low risk. The worst that can happen is that the investor has to buy more shares at the strike price shorted.

For example, see the July 19 expiration period, 18 days from now. The $207.50 strike price, which is 3.5% below today's price (i.e., out-of-the-money), trades for $1.01 per put contract on the bid side. That provides an immediate yield of 0.487% (i.e., $1.01/$207.50). In a little more than two weeks, if AAPL stock stays above $207.50 the short seller of these puts has no obligation to buy 100 shares at $207.50 and they still keep the 0.487% income.

A similar trade can be done with the July 26 expiration period. The $205 strike price is further out-of-the-money (i.e., -4.67% below the stock price) and has the same $1.01 bid price. That provides a higher yield of 0.493% income over 25 days, slightly over 3 weeks. Since the strike price is lower, the investor has less buy-in risk.

AAPL puts expiring July 26 - Barchart - As of July 1

The bottom line is that this is a way for existing shareholders to generate extra income and for others to set a disciplined buy-in price. For example, even if AAPL falls to $205, the investor must buy shares at that price, but their breakeven will be $205-$1.01, or $203.99. 

Moreover, investors can repeat this trade every expiration period to generate extra income and lower their breakeven price. The bottom line is that AAPL stock looks cheap here. Investors can use OTM puts to buy into the stock at lower prices as well as generate extra income, especially if they already own AAPL shares.

On the date of publication, Mark R. Hake, CFA did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.