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Apple Discounts TV but Who's Buying the Stock?

NEW YORK (TheStreet) - Apple (AAPL - Get Report) is discounting its Apple-TV, a rare event that could translate into a catalyst for a stock that has under performed this year.

Shares are down 6.2% in 2014, closing Friday at $526.24, but Apple's discount on Apple TVs purchased from now until March 5, suggests the company may be poised to release its next generation of the television streaming device. The discount, by the way, includes a chance to get a $25 iTunes gift card.

Apple TV buyers may also be rewarded for waiting for the next generation product. It's unusual for Apple to discount anything, and if the company is about to release the next generation TV, it may need the room in the warehouse.

It's hard to imagine apple is having inventory issues, especially in light of the promotion localized to the U.S. With that said, if Apple doesn't release a new TV relatively soon, the gift card may mean soft sales and lower revenue / margins (because of discounting). It's reasonable to assume we should expect an announcement of the newest TV.

Second, if the company does release a next generation TV anytime soon, the positive media attention should be a catalyst for a move higher. A 2-5% lift as a result of renewed enthusiasm for the product is probable, especially with the shrinking float as a result of share buybacks.

If you're a long-term investor, I wouldn't become focused on the daily chart if you watch it at all. 

For investors interested in Apple but don't want to commit to over $52,000 for 100 shares, options may provide the answer. Apple is one of the few companies that offer options for 10 shares at a time instead of 100 share contracts. By using 10 share contracts, you can better dial-in your risk exposure. Also, if you buy less than shares, you can hedge with 10 share contracts. It's especially helpful during earnings season when stocks tend to whip up and down quickly.

Because option pricing is influenced by underlying stock dividend yield, Apple options are cheaper to buy. Of course, you don't receive the dividend shareholders get. Using a covered call strategy, investors can buy shares for about $526.22 and sell the May expiration $560 calls for about $10.10 for a net cost of $516.12 at the time of writing.

Call options give the buyer the right, but NOT the obligation to buy the stock at the strike price at or before the expiration date. In the above example, the buyer has until the third Friday of May to exercise. If the shares of Apple are higher at that time, the buyer will almost certainly exercise.

This covered call caps the profit at $43.88 ($560 strike - $516.12). Even so, that's about a 9% gain in under 90 days if you count a dividend payment. On the other hand, if the stock goes nowhere and is at the same price, the option seller keeps all the premium and the stock. Best of all and my favorite reason is covered calls lower volatility compared to simply buying the stock.

At the time of publication, Weinstein had no positions in securities mentioned.

Follow @RobertWeinstein

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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