AAPL Pre-Earnings Update

by Dan April 20, 2011 7:46 am • Commentary

Ok this is a tough one. I have been cautious on the name for the last few months, especially above $340, not because I think it is a bad company or there are any real problems there, but quite the contrary, it is such a good story that it has become such a crowded trade.

-2 weeks ago I suggested 2 Bullish trade structures out to June to be contemplated by existing Longs, or those wishing to initiate new Long positions.  Primary objective was to come up with trades that would give investors “options” rather just joining the herd, I want to make cautious long plays that either define my risk or offer a band upside or downside where I would get long, rather than at the money.

-Last week I suggested a Short Term Bearish play using April21 weekly options in an effort to make a targeted bet on just the earnings event.  Since then the stock sold off to a very key near-term support level of 320, and since bounced back from that level in a very decisive way.

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-If you have this, or similar bearish trades on in AAPL you would be very foolish not to consider INTC‘s results and price action and think about how tech sentiment might have changed in the short term.

-MY VIEW remains that AAPL will certainly have a good quarter especially when you consider that they introduced the iPhone at VZ, and the new iPad2 and that it is more likely to trade on their outlook.  Outlook includes time table for Steve Job’s return to the company, any commentary, which we will be very unlikely to get, regarding the potential release of iPhone5 in 2011.

-AAPL not likely to disappoint, and likely to see forward guidance buoyed by good sales of iPhone at VZ and continued success of iPad2.  Don’t expect Jobs to jump on the call as he did in January.

SO THE NET OF IT IS- I haven’t change my tune, I would like to see a little fear for once put in the name and have the opportunity to buy the stock closer to 300 as I am bullish on the story (as everyone else is) but think that potential near-term headwinds/uncertainty (see here) could cause the stock a little dip.  A break below 320 would very likely see the stock move towards 300 and then pause.

-If you make this short term bearish bet look for ample risk reward relationships, for instance the trade that I suggested on April 14th (here)  offers a better than 4.5 to 1 payout if the stock is down about 7.5%. I like those odds.

-The suggestion I made on Options Action on Friday (below) suggested looking out to May expiration to capture the earnings event and the Nasdaq re-balancing to take place May 2.  This trade also offered a similar payout, risk 2 to make 8.

-So my advice now is to risk what you are willing to lose, don’t short stocks like this, with all the very near term bearish sentiment and recent under-performance, the stock could clearly bounce as short interest has crept up of late in front of the re-balance……DEFINE YOUR RISK IF YOU WANT TO BE CONTRARIAN, PUT SPREADS ARE PRICED FAIRLY.