Trade Update AAPL: The Moment of Truth for My Weekly 420 Puts

by Dan January 13, 2012 9:19 am • Commentary

Trade Update Jan 13th 21012 at 9:25am:  So this is it, I came into the week thinking that AAPL was a bit extended and that the stock could see a little pull back.  On Monday morning I bought the weekly (tonight expiration) 420 Puts for 1.85 when stock was about $426.

So this is kind of it, the moment of truth with basically 6.5 hours to expiration, I am going to have to make some decisions about how I think the stock will trade today.  With the stock below 420 in the pre-market I will likely see if the sell-off can catch a little steam and I will either look to sell the 415 puts if there is any meat on them, or look to take some off for a profit.   The real question is what if the stock is above 420 and I am losing money on the trade with just hours to go…..I will likely hold them until I feel that the stock or the market will not break today.  Stay Tuned.


New Trade Jan 9th 2012 at 10:05am:  AAPL is up a little more than 5% ytd and up 13% from the mid December lows.  The stock is up almost 1% on some positive comments from Goldman Sachs this morn as it relates to Dec qtr iPhone shipments.  As evidenced by my comments below I believe the stock displays quite a bit of good news at current levels.

Technically the stock is very extneded and I would look for a bit of a pullback and then a consolidation before the company reports and gives guidance on Jan 24th.

I want to make a short term, defined risk, relatively low premium bet that the stock retraces a bit of the recent move, this week.  So here is the trade:

TRADE: AAPL $426 Bought Jan13th weekly 420 Put for 2.00  (Update: new Avg is 1.85, bought half 2.00 and another half at 1.70)

Break-Even this Friday on weekly Expiration at $418 or lower…..lose up to 2.00 of premium paid btwn 418 and 420 and max loss of 2.00 above $420.


Original Post Jan4th, 2012:

AAPL: The Good, The Bad & The Ugly, Why Steve Jobs by Walter Isaacson is Exhibit-A of Why AAPL May Finally Hit The Innovation Wall, We Offer a Low Premium Structure To Protect Your Long Stock


OK, I will start this post on AAPL in a manner similar to most that readers of this site have become accustomed to, I will gush about the company until you can’t take anymore  and then I will try to make the case why the stock may hit a wall in the coming months/quarters.

Let’s start with the obvious, AAPL is the most one sided investment story the world has ever seen.  Wall Street analysts can barely contain their excitement with 49 Buys, 6 Holds and only 1 Sell with an average 12 month price target almost 25% higher than current levels.

The financial prowess AAPL has achieved in the last decade almost rivals their innovative product triumphs, the company has grown earnings from about break-even in fiscal 2001 to a little less than $28 a share in their latest fiscal year 2011.  In that same period they have grown annual sales from $5.6billion to over $108billion, and have done so not only by taking market share in existing product categories, but by creating revenue out of thin air from products that did not exist until they were introduced by the most compelling and successful salesman in generations.   For comparisons sake, MSFT grew annual revenues from $25billion to $70Billion in that same time period.

The company is a cash generation machine, and their almost $82billion in cash on their balance sheet (and growing by about $5 billion a qtr) and zero long term debt, makes the company one of the safest investments on the planet.  With expected EPS and Sales growth of about 26% for fiscal 2012, the valuation of only about 12x and earnings and about 10.5x ex-cash makes shorts think twice, and then a third time before going down a path that has proven to be a fruitless endeavor since the bottom of the financial crisis in early 2009.  The stock is up 425% since January 2009 and since that time there have only been about 8 peak to trough drawdowns in the stock of 10% or more, 5 of which have occurred in 2011, a year in which the stock closed up 25% on the year and just a few percentage points from its all time highs.

Aside from the financial performance of the company, AAPL’s ability to dictate consumer trends has been uncanny and has literally turned multiple industries (that have existed for over a century, most notably Music, Books and Publishing) upside down on their head or offered them a lifeline.  And in hardware they have unseated once stalwarts in the computer hardware, software and mobile phone industries, with companies like DELL, HPQ, PALM, MSFT, NOK, MOT, SNE, RIMM, ADBE and GOOG all reeling from AAPL’s entrance into their respective markets.

Since I started trading at a hedge fund in early 1997, AAPL the company, its products, the stock, and most uniquely its founder and CEO have captivated the investment and technophile world alike.  But this, unfortunately, is kind of where the story runs out of steam.  How much better can things really get? At what point does the law of large numbers take over? If we all agree that Steve Jobs was the primary driver of the tremendous success the company had on the product front, how can they possibly keep up with their past pace of innovation? Keep reading for my take and trade:


After reading the Steve Jobs biography by Walter Isaacson (on my new Kindle Fire sadly) I think readers may be able to arrive at their own conclusions that coincide with my thesis that the next few years for AAPL will be far more challenging for the company, and quite possibly the stock than the last few, and the ability for the stock to continue to outperform the overall market may be in serious jeopardy.

The Jobs biography, in my opinion, is Exhibit A that without Steve Jobs at the helm of AAPL, and without his maniacal control from product development, design, presentation, retail, negotiating for content to driving and inspiring his employees and then finally captivating consumers can never have anywhere near the magnitude of success that they have had in the last 10 years on the innovation front.

Future Leadership/Management & The Board

I think it is fair to speculate that AAPL is likely to face more product misfires without Jobs in the coming few years than they have had in total since Jobs return in 1997. Lets use the recent example of “Antena-Gate” in the summer of 2010, following the launch of the iPhone4.  If Jobs wasn’t around (and the book tells us that he almost wasn’t) the situation would have been a massive PR debacle that could have setback the company’s prerogatives in the SmartPhone space for years. Frankly, any other company other than AAPL would have found themselves in a Palm Pre sort of death spiral, losing market share to other phones that could actually make calls. The media would not have been kind if that situation happened to Microsoft or RIMM. This could be coming to a theater near you as Tim Cook “the operator,” who Steve Jobs himself refers to Issacson on page 458 in chapter 35 of the biography as:

“not a product person, per se”.

This statement could identify one of the biggest risks to AAPL’s ability to INNOVATE at the level in which it had up to the release of the iPad in April 2010.

The book spends a lot of time, and gives a lot of credit to Jobs anointed “soul mate,” AAPL’s head of Design Jony Ive, but in an interview with Ive detailed in Chapter 26 page 347, is a bit telling of potential conflicts to come with the new CEO Cook…..

“Ive also bristled when outsiders portrayed Jobs as the only ideas guy at AAPL. “that makes us vulnerable as a company”, Ive said earnestly with his voice soft. But then he paused to recognize the role jobs in fact played. “in so many other companies, ideas and great design get lost in the process” he said. “the ideas that come from me and my team would have been completely irrelevant, nowhere, if Steve hadn’t been here to push us, work with us and drive through all the resistance to turn our ideas into products”

Make no mistake about it, AAPL was not a normal company under the leadership of Jobs, the book clearly lays this out, it was Jobs way or the highway. This is obviously conjecture, but after years of torment and humiliation under Jobs, I can’t imagine too many senior managers are gonna take too much shit from CEO Cook and I can’t imagine that Ive in particular after being passed over for the CEO role won’t be anxious to start his NeXT act.

For years, since Jobs first medical leave in 2004, market participants pondered the question; how much would AAPL’s stock go down when Jobs could no longer run the company? Now with that questioned answered,  I think as investors get more familiar with the company ex-Jobs — the question will now be how much will the stock go down when Jonathan Ive leaves the company??

With Ron Johnson’s (the man widely credited in creating the most profitable retail chain on the planet at AAPL over the last decade) recent departure to be CEO of JCP (really?? JCP), will more senior managers that were cogs in Jobs wheel also depart to make their own legacy, a legacy they were deprived off by the attention/credit grabbing Jobs at AAPL?

It was also blatantly obvious over the years that AAPL’s Board of Director’s was Jobs board, hand picked so he would never have to go through the trials and tribulations of his tenure at AAPL in the 1980s.  Since his return to AAPL in 1997, Jobs railroaded his initiatives down the throats of managers and the board alike, there was no stopping him.  This is not exactly how $100billion revenue companies are run these days and I think it is safe to say that while most of Jobs huge product gambles paid off, Cook will likely have a fraction of the latitude that Jobs had and I think it is also safe to say that without greats risks the company is not likely to continue to see the magnitude of the rewards witnessed in the recent past.  The following quote from Tim Cook in Chapter 35, page 461 sums up my belief why AAPL without Jobs’ far reaching influences is likely to dramatically slow the pace of innovation:

When jobs came back from cancer in 2005 ” he came back on a mission” Cook said, “even though he was now running a large company, he kept making bold moves that I don’t think anybody else would have done”.

Product Innovation and Competition Going Forward

Since the introduction of the first iPad in April 2010 and iPhone4 in June 2010, I think it is fair to say that all product refreshes since then, have been merely “Evolutionary,” falling way short of Jobs’ “Revolutionary” expectations.  This  pause in innovation started on Jobs’ watch and will very likely continue under Cook’s.  As an aside I have bought probably 20 plus AAPL products in the last 6 years, I HAVE NOT BOUGHT THE iPHONE4S or the iPAD2, and will not.  On the evolutionary front there have been refreshes of the MacBookAir, iMac, iPod lines and AppleTv (there are prob a few others but generally irrelevant, there ain’t that much more they can do at this point.)  And in some ways they maybe doing more harm than good crowding their ecosystem.  The iPad & iPhone are cannibalizing the iPod Touch, the 11inch MacbookAir is cannibalizing the iPad and at some point with all these mobile computing devices occupying more and more of our attention, the iMac share is likely to fall.

Recently there has been a ton of chatter about AAPL entering the TV space.  This was something Isaacson was not shy to share in most interviews on his book tour.  But any enthusiasm in the stock about this prospect in the near term should be tempered.  One of the biggest risks I see for Cook and AAPL’s stock would be rushing to market a product that just isn’t at the standard of the the first iPod,  iPhone or iPad.  Cook will not make this mistake, especially as rabid competition swirls around iPhone from Android, around iPad from just about everyone at a much lower price point and around iPod from, well, themselves.

And don’t forget, Jobs had his miscues too. AppleTv has been a fairly big disaster under Jobs and gives little confidence that AAPL, without Jobs, will be able to tackle TVs. And there was MobileMe. For anyone who had the unpleasant experience of paying $100 a year to use it, (like me) saw that AAPL, under Jobs, even with last year’s intro of iCloud, gave little confidence that they would be able to create a game changing cloud offering (the jury is still out here.)

While Jobs had an uncanny ability to predict what consumers wanted he also had a tendency to outsmart himself, last year in one of his rare appearances on a quarterly conference call, Jobs claimed that the “7inch tablet is DOA”.  This was in response to RIMM’s introduction of the Playbook Tablet, but also in anticipation of what he knew would be lower costs smaller form factors from AMZN and the Koreans.  AMZN’s Kindle Fire success, in just a couple months, is evidence enough that he was terribly wrong on this front.


I am sure I am missing a lot here, on both sides of the argument, but this was just some stuff off of the top of my head…..In AAPL’s latest qtr released on Oct 18th, 2011, the company night have given investors reasons to start re-thinking their possibly misplaced exuberance on the stock.   The company’s performance in their Sept Quarter was classic AAPL, they beat their own guidance but missed overly optimistic consensus estimates.

Here are some quick highlights on their latest Quarter from BGC Analyst Collin Gillis in a not to clients on Oct 18th, 2011:

The company failed to set records in multiple categories in the quarter, a requirement for the company to meet expectations. Macintosh sales and iPad sales were all-time records, but iPhones, revenue and cashflow were not.

Revenue of $28.27B exceeded guidance of $25B and compares to our estimate of $29.15B. Revenue grew 39% YoY but declined 1.1% sequentially. Revenue growth decelerated to 39% in the September quarter from 82% in the June quarter, and we expect this trend to continue in the near future.

Earnings of $7.05 exceeded guidance of $5.50 and our estimate of $6.69 but were below consensus estimate of $7.29, and represented growth of 52% YoY.

iPhone: The company sold 17.07M units in the quarter, but iPhone sell – through declined due to the transition to iPhone 4S. September quarter ended with about 5.75M iPhones in channel inventory (sequential decline of 180,000). iPhone and related products contributed $11B (+24.5% YoY, -17.5% QoQ) in revenue.

Macintosh: Apple sold record 4.89M Macs during the quarter fueled by strong growth in MacBook Air and continued performance of MacBook Pro. Mac sales contributed $6.2B in revenue. For Apple to continue to outperform we maintain that laptop and desktop share needs to continue to grow. This is the fourth consecutive quarter that Apple has set a record in Macintosh sales.

iPad: iPad contributed $6.8B (+146% YoY) in revenue as record units of 11.12M were sold (+166% YoY).


MY TAKE:  Obviously it is hard to knock the recent performance……but as iPad revenues overtake Mac sales and obviously start to cannibalize them it may be hard for the company to maintain margins as stiff and plentiful tablet competition at much lower price points is squarely focused on AAPL’s first mover status.

On the iPhone front I think the company is dangerously testing their staying power with just one NEW evolutionary phone a year.  As I said above, this was the first iPhone I didn’t buy, Siri,  faster processor and slightly better camera in the same form factor as the iPhone4 just wasn’t enough to get me to shell out $500.  Now obviously I would be gravy and the future success of iPhone lies with geographic expansion, but Android is growing like weeds at a variety of price points and the next “antenna-gate” without Jobs at the helm could set the company reeling.

Investors own AAPL because of the future innovation, and when you consider the potential for new innovative products this year, investors may want to take pause……the next catalyst is the March/April intro of iPad3, and my sense is this will be fairly unexciting….this is plenty of talk of leaving iPad2 at a lower price and adding some bells and whistles to the new iteration and maintaining the introductory price point of $500, but come on, is Tim Cook really gonna be able to convince people to keep upgrading?  This will be a very telling test for the company…….

Throughout the year I would expect a re-design of the iMac and possibly a refresh to notebooks (ho-hum) and then the big one will the Oct refresh of iPhone….if this doesn’t wow, then watch out below.   When the company added VZ to it’s U.S. carrier list for the iPhone4 it do so breaking its normal cycle of Jun/July releases… AT&T customers have had too wait until October for a refresh in 2011 and very likely in 2012.

AAPL will only continue to rally if investors feel that the company can continue to execute on their decade long tradition of creating desirable innovative products.  I feel that there is a strong likelihood that given a whole host of factors detailed above that this will be a tall order for the company in the coming year.

When the company reports their fiscal q1 in a few weeks if there are some continued signs of deceleration in iPhones and the company did not pick up some of the lost Q4 sales due to the product transition I would expect the stock to come in about 10% to its 200 day moving average of about $370.

Trade Structure For Long Holders, Consider Put Spread Collars

Here is a way to protect 15% of downside for long holders with spending less than 1% of the underlying.  This sort of structure could be interesting for those who don’t want to sell their AAPL stock for tax reasons or because they are unsure of the future but would like the potential to participate in additional upside.

AAPL $410   Sell the July 460 call to Buy the July 400/34o Put Spread for 1.00

-Sell 1 July 460 call at 19.60

-Buy 1 July 400 Put at 34.50

-Sell 1 July 340 Put at 13.90

(prices are approximate as the spreads are wide)

Break-Even On July expiration:

Profits Btwn 410 and 460 make up to $50 (less the $1 premium that you paid for the structure, with your Max gain at 460 or higher of $50 as your stock will be called away at 460.00.

Losses of up to 11.00 btwn 410 and 400 (difference btwn current stock price 410 and the 400 put strike that you own less the 1.00 in premium that you spent for the structure)….

But get protection btwn 400 and 340… the biggest risk is that the stock is below 340 on July and you have no protection below that but you have mitigated almost $60 of downside risk.



Leave a comment