BEST WAY TO BUY CLOUD COMPUTING STOCKS: Investing in ...

Now that it?s April, and the tech stocks, ETFs, and sector mutual funds have run so far this year you must be asking yourself ? is it too late to invest in cloud computing, social media, big data analytics, mobility, location-based e-commerce, virtualization, and IT storage companies? Well, no?

Apple (ticker symbol: AAPL) has really taken the front seat in terms of rapid stock movement, shoving the NASDAQ (ticker symbol: NDAQ) up 18.25% for the year while Apple moved 56.46% (as of 4/7/12). You?re crazy if you believe that hedge funds, institutional buyers, and others won?t sell some Apple stock to lock in those gains if we go into full scale market correction mode. And that might be good ? but we still have the crazy hype of the impending Facebook (ticker symbol: FB) initial public offering, which has left many individual investors around the globe asking themselves if they should buy the Facebook IPO? If that IPO goes off as planned on the Nasdaq in late May (?trade in May and go away? ? as the old Wall Street saying goes), then we may have to wait for real softness in the market until the summer.

BEST WAY TO BUY CLOUD COMPUTING STOCKS: Investing in Akamai with Options

Looking at the wide field of interesting cloud computing technology stocks, and the run that they have already posted in 2012 ? it?s tough to just start buying them here. But here are some interesting candidates to put on your watch list for both stocks, and their underlying options.

Akamai Technology, Inc. (ticker symbol: AKAM), Market Cap: 6.46B; P/E 33.87; closing price on 4/5/12: $36.33; YTD up 12.55%. Web delivery company (content, video, applications, and acceleration) ? this company helps power cloud computing in pretty critical ways ? makes web media streaming, e-commerce, and many financial services companies work.

You could consider buying the stock here: 100 Akamai shares x $36.33 = $3633.00 (or) Sell a $36 strike cash secured put for Aug 2012 expiration: based on BID/ASK spread of $3.65/$3.75 = receive $370 (minus fees, obligated for 133 days); Exercise price would be $36 ? $3.70 (premium received) or $32.30 ($3230).

If the market continues its climb through the summer, the AKAM Aug 2012 $36 Put might not get exercised. You would keep your $370 and sell another put. If you think we will pull back, or to create a hedge, you could also do this trade as a credit put spread. How?

Sell-to-Open the AKAM Aug-12 $36 PUT for $3.70 ($3.65/$3.75 bid/ask)
Buy-to-Open the AKAM Aug-12 $34 PUT for $2.79 ($2.77/$2.81 bid/ask)

Credit received: $91 on $200 risk (difference in strike prices); actually $109 risk.

Possible scenarios:

1. You eventually want to have the stock PUT to you at $36/share ? it falls quickly and you sell your lower $34 put for a small gain (assuming the time decay doesn?t offset the amount in-the-money!) Your gain lowers your cost basis even more and then you accept Aug-2012 exercise at $36, with your sold put expiring in your favor ($370). The plan is to start the trade as a credit put spread but convert it to a cash-secured-put as soon as the lower put becomes profitable.
2. The stock stays above $36 until August expiration, and you keep the put spread credit of $91. If you leave this as a put spread, the money tied up is only $200, so the entire $3600 isn?t locked up by the CSP.
3. If the stock completely craters (far below $36 or $34) you can let it be PUT to you at $36 ? $3.70 = $32.30 per share AND sell the $34 PUT outright for a profit to lower your cost basis even more, possibly even lowering your cost basis for Akamai to $30/share. (You must then decide if that?s a fair price!) If the stock drops, but you?re no longer interested in owning it, you could take the loss of $109 (your maximum loss is the difference between the strike prices minus the premium received $36-34 = $200 minus $91 (without accounting for transaction fees).

STRATEGY APPLIED TO OTHER CLOUD COMPUTING STOCKS

You can apply this same strategy to other cloud computing technology stocks that interest you. Rackspace Hosting (ticker symbol: RAX) or Amazon (ticker symbol: AMZN) with its AWS (Amazon Web Services) might be interesting candidates. For virtualization you might try this with VMware (ticker symbol: VMW), but the options are set at $5 strike intervals. With Salesforce.com (ticker: CRM) you have the benefit of their established SaaS (software as a service) offerings, with a growing push into social enterprise with Chatter. What about Hewlett-Packard (ticker symbol: HPQ), or International Business Machines (ticker symbol: IBM) with the rise of new trends in business intelligence ? like unstructured big data analytics as a service? At $205 per share, most individual investors cannot sell CSPs on IBM, obligating themselves for a $20K purchase (except maybe in a retirement account). (The best way to buy this stock might be in smaller lots of 3-5 shares at a time, or with the companies DRIP and DSPP plan through Computershare, their transfer agent.)

You might also decide to do this with SKYY, the First Trust ISE Cloud Computing Index Fund, which currently has options trading in April, May, Jul, and October 2012. The only danger here is the lower open interest and volume in these options means greater BID/ASK spreads. But at $21.07, and with option strike prices from $10-$30, there are ways to hedge individual company risk with the sector ETF. (More on that later? This way you may never have to figure out which is the best cloud computing stock to own.)

CONCLUSION

Remember, it?s always best to sell puts (either CSP ? cash secured puts, or put spreads) on stocks you really want to own because it always gives you more choices as market conditions change.

DISCLOSURE: The author owns IBM and AKAM stock at the time of this writing.

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