AAPL Longs May Want to Consider Low Cost Collars Into Year End

by Dan November 11, 2011 2:14 pm • Commentary

Preview of my AAPL discussion on Options Action tonight:

Updated Thoughts on AAPL: The stock has had a rough week down about 4% vs the SPX which is up about 1%.  Lots of chatter in the markets weakness in AAPL’s supply chain as a result of production cuts of iPhone 4s’s and weaker than expected demand for iPads.  This also comes in a week where there has been some healthy discussion of the AMZN Fire tablet as a “real” competitor to iPad.  All that is obviously speculation and only time will tell as it relates to smart-phone and tablet competition, but in the near term the stock is under pressure and acts like it has more room to the downside.

AAPL has been the most one sided trade in the long/short equity universe for the last few years. Their financial performance, product innovation and eye popping equity returns have not given many investors reasons to take profits.   That all might have changed in the last month or so….October might have been the worst month for AAPL as a company in recent memory.  The start of the month brought a very sobering reaction to the first iPhone out of 5 that was not introduced to the world by Steve Jobs……and then very sadly followed by his death.  In the end the stock rallied to make new all time highs as the company headed into their fiscal q4 earnings only to miss and guided below the street slightly above consensus, but below whispers (this was the first instance that the company missed in almost 6 years).   So here’s the trade and thoughts to go with it:

I remain cautious on the name (I was short into the earnings print and have remained bearish since, see Nov put fly below) and have felt for sometime, even before Job’s death that the next few years for the company and the stock will be far more challenging than the last few.  The reasons are simple, competition is a big one, and it is coming from every possible direction, the second and maybe more important is innovation, if the company can not keep pace with the last 10 years innovation there is a very good chance they find their stock trading at an even more pronounced discount to the market than it currently does.  Another big challenge is execution…..Tim Cook the new permanent CEO has helmed the ship effectively during 3 extended periods of medical leave for Jobs…..in the last 2 years though their last 2 iPhones have appeared to have massive flaws that has caused general customer disappointment.  Last year’s iPhone4 had an antenna problem that the company first tried to blame on AT&T, then acknowledged there was a design flaw and then sent out free bumpers to supposedly shield the problem.  This latest iPhone 4S just released supposedly has a bug that drains the battery very quickly and the company has already acknowledged the problem and put forth a software fix that many users suggest exacerbates the problem.   If this was any other company on the planet and they had one phone and that phone had a massive problem the stock would get destroyed….in the past Steve Jobs “reality distortion field”  was able to deal with such criticism, but I am not sure Tim Cook has the Star Trek know how or the showmanship to deflect such issues in the future……I could go on an on on this front, but this is not what I believe to be the reason why the stock has been weak.

I believe, as stated above, that long term investors feel the bloom is a little bit off of the rose and that the future for AAPL will be far cloudier than the recent past. And with such fabulous returns over the last few years why not take some profits? Also, this has been a massive hedge fund holding and hedge funds have had a tough year and will likely see substantial redemption into year end where they will have to raise cash….often times they will do this with some big winners like AAPL, AMZN or GLD.

SO, if I were long and nervous about some of the issues above, but not yet willing to part with the stock (possibly for tax reasons as you head into yr end), I would consider collaring my stock.

TRADE:  AAPL ($383) Buy Dec 380/350 Put Spread for 9.00 and sell the Dec 400 Call at 8.00 to fund it….the package Costs 1.00

-Buy 1 Dec 380 Put for 14.50

-Sell 1 Dec 350 Put at 5.50

-Sell 1 Dec 400 call at 8.00

Break-Even On Dec Expiration:

Profitable btwn 384 (current stock price plus 1.00 premium) and 400 make up to 16.00, stock called away at 400.00

Losses btwn 383 and 380 and then long protected btwn 380 and 350, no protection below 350, down about 8.5%




Existing Bearish Collar trade from Nov 2nd below:

Update Nov 10th, 2011: Lots of questions regarding AAPL today and its counter-trend weakness….A firm named Cleveland Research was out with a note this morning that Bloomberg summarized here:

Cleveland Research cut Apple iPad
unit ests. for Dec. qtr to 12m vs prior 14m.
• Visibility from supply chain has softened in last several weeks with “surprise” revisions to orders, visibility: Cleveland Research
• IPhone demand remains strong; maintain Dec. qtr est. 25m units, FY12 112m units
• Cleveland Research cut AAPL Dec. qtr EPS to $9.53 vs. avg. est. $9.76; FY12 EPS to $35.13 vs. avg. est. $34.73
• AAPL down as much as 3.2%, lowest since Oct. 10, on 66% of 3 mo. avg. vol.; AAPL shrs have fallen 4% in last 5 days vs SPX down 2.1%
• Earlier AAPL fell below 50-DMA
• Cleveland Research rates AAPL buy

I have never heard of this firm so I can’t speak to their credibility or their accuracy. I do know that they issued a report yesterday on BBY that was supposedly the reason why the stock was up in a down market.  I think today’s weakness says more about sentiment in the name as opposed to the conviction in Cleveland Research’s opinion.  Since Jobs death and their disappointing qtr reported last month the stock has been stuck in a range btwn 390 and about 408.

Technically the chart looks challenged near term breaking the uptrend line and a fairly significant support level.  Next level of support looks to be about 378.

1 Yr AAPL chart from Bloomberg


As for the Nov Put Fly I am long, it is currently worth about 1.75 vs stock at ~385.50.  I paid 1.10 for the 10.00 wide fly that expires in 6 trading days.  At this point I feel like I have this right where I want it and will hold out on doing anything as the commissions make it kind of cost prohibitive to trade in and out for a profit that doesn’t equal at least a double.


Original Post Nov 2nd 2011: AAPL Feels A Bit Heavy, Short Term Bearish Structure That Benefits from a 4% Decline By Nov Expiration

Since disappointing on earnings and guidance 2 weeks ago, AAPL has been stuck in a 10 point range btwn 406 to 396, down about 5 or so % from the all time highs.

Technically, the chart looks fairly toppy as it has below a trend-line that dates back to June and now below a recent support line of about 400.  (click on chart to enlarge)

1 Yr AAPL chart from Bloomberg

I think the news this week will continues to get worse as many investors will likely be disappointed by the ECB and the outcome of the G20 meeting, i want to tactically short names that I think could be vulnerable over the next couple trading days….AAPL looks ripe for a sell off, barring any positive company specific news.

I actually would like to get long AAPL on the next pull back as we head into the holiday selling season as I suspect AAPL products like iPhone and iPad will be on most gift lists.

But in the meantime, I want to look for a low premium way to benefit from what I suspect could be some weakness in the name in week to come.

TRADE: AAPL ~$397 Buy NOV 390/380/370 Put Butterfly for 1.10

-Buy 1 Nov 390 Put for 7.95

-Sell 2 Nov 380 Puts for a total of 10.00 (5.00 each)

-Buy 1 Nov 370 Put for 3.15

Break-even On Nov Expiration:

Profits btwn 388.90 and 380 make up to 8.90, at 380 make full 8.90 and payoff trails off from 8.90 down to 371.10

Losses below 370 and above 390, lose full 1.15 in premium paid…btwn 370 and 371.10 lose up to 1.15 and btwn 388.90 and 390 lose up to 1.10

TRADE RATIONALE: stock is in a funk and I think all of the news in OCT in the name is still playing its way out as investors reconsider the company’s opportunities as it goes forward without it’s founder Steve Jobs.  I am targeting a low premium way to play for the stock to move back to support about 4% from current levels

This is not a high conviction trade but I like the Risk Reward of paying 1.10 to make 8.90 if the stock is down 4% in the next 2.5 weeks.

As always I use limits as the bid ask is fairly wide and I usually get filled inside the offer.