AAPL: Near-Term All Systems A Go, Longer-Term A Bit iCloudy

by Dan October 12, 2011 9:31 am • Commentary

3rd Update Oct 12th, 2011: with the stock at 408.50, I am selling this position at 8.00 taking profits and locking in a gain….Risk reward is now risk 8 to make 7 by next Friday….will look to roll this up and out for earnings…..check back for another structure with better risk reward relationship.

2nd Update Oct 6, 2011 1:45 pm:  Buying another 1/4 postion at 2.70 with stock 371.75.  My new Average is 3.00 for the spread.   risk 3.00 make 12.oo if stock 415 or above on Oct Expiration.

Update Oct 6, 2011 1:20pm: I decided on pulling to trigger on the 2nd trade option (below) after the stock just sold off 2% from this mornings highs……but I decided to buy a call spread and Buy 1/4 to 1/3 of a position.  

TRADE: AAPL $377 Bought Oct 400/415 Call Spread for 3.30

-Bought Oct 400 call for 6.00

-Sold Oct 415 call at 2.70

Break-Even on Oct Exp: 

Profits: btwn 403.30 and 415 make up to 11.70, above 415 make full 12.70

Loses: btwn 403.30 and 400 lose up to 3.30 or less than 1% of the underlying. below 400 lose 3.30.

TRADE RATIONALE: I want to play for a bounce back towards the all time highs as I think their fiscal Q4 earnings report Oct 18 should provide an upside catalyst as guidance will reflect Holiday sales of the iPhone 4S at 3 US carriers.  I think you want to define your risk though as investors are clearly a bit nervous as evidenced by the stocks reaction following the iPhone launch event on Tuesday when the stock sold off 5%.   I have many reservations about the story under new management over the long haul, but for now I want to trade this tactically around events as I did long Put Spreads into Tuesdays iPhone4 Launch.


Original Post Oct 6, 2011 at 12;30pm:

AAPL  wasn’t down long on the very sobering and unfortunate news of Steve Jobs’ passing as I think most large shareholders had become uncomfortably aware of the this potential near-term outcome.

Following the company’s less than exciting iPhone hardware update on Tuesday, the stock quickly sold off to key support at its then 200 day moving average at about $353.  Since bouncing off of that technical level the stock has outperformed the SPX by almost 2%.  Technically 350 looks like the last line of defense for the name if we are to have another test of the lows in the market or company specific news.

[caption id="attachment_5262" align="aligncenter" width="300" caption="1 YR AAPL chart from Bloomberg"][/caption]


The company is going to report their fiscal Q4 on Oct 18th after the close…..the options market is currently implying about a 4.5% move post earnings which is rich to its 8 qtr average move of about 2.7%.   The stock has a history of gapping up or down in line with the implied move and then settling in somewhere below that as calmer heads prevail.

MY TAKE: I think the next few years are likely to be far more challenging than the last few…..the likelihood of them being able to replicate the performance on the product front and thus in the stock is not great as the smartphone and tablet markets mature and become commoditized like pcs, and add Jobs death and now the risks increase dramatically for some miscues.  I have a lot of thoughts on all this and the potential risks of this company battling the law of large numbers with ever increasing competition on so many fronts, but to be honest I don’t think this is the most appropriate time to lay that out…..

Near Term though I want to look for a low premium defined risk way to play what I think can be a rally back towards the recent highs on a strong quarter and guidance.  On Sept….[private]  I am Considering a couple trades to play the event in a week and half…..

TRADE1: AAPL ($381) OCT 405/420/435 Call Butterfly for 1.60

-Buy 1 Oct 405 call for 5.80

-Sell 2 Oct 420 calls at 5.40 total (2.70 each)

-Buy 1 Oct 435 Call for 1.00

Break-Even on Oct Exp:

Profits: btwn 406.60 and 420 make up to 13.40, at 420 make 13.40, btwn 420 and 433.40 profits trail off.

Loses: btwn 406.60 and 405 lose up to 1.60, btwn 433.40 and 435 lose up to 1.60 and below 405 lose full 1.60.

TRADE RATIONALE:  I think if the market settles here and earnings next week come in better than expected AAPL will continue to rally and look to make a matched high.  The stock is off about 8.5% since mid Sept and I think traders will be gunning for that level…I am not looking to hold this to expiration, look to make 2-4 x the premium that I am risking…..



TRADE 2: USe the same amount of premium that you would allocate to a Call Fly and BUY the OCT 400 Calls for 7.00 with stock at $381…..I will look to turn this into a call spread once the stock starts to go my way.

I will wait for the stock to come to me, but wanted to put this out there so that when I do put it on you know my thinking.