Trade Update April 24th, 2012 at 3:25pm: AAPL‘s trading in the last month was been a little “APPLETASTIC” even for the true believers……for those of you who have sworn to never sell your AAPL stock, an options strategy such as a Put Spread Collar could make sense if you are starting to “feel it in your Plums”. This strategy makes sense to use tactically around events just like today’s earnings report that is filled with potential uncertainty.
TRADE: OWN AAPL Stock at $560 (already own and don’t intend to sell). Buy Put Spread Collar for even money.
-Sell the Apr27th weekly 600 call at 10.00
-Buy the Apr27th weekly 550 Put at 20.00
-Sell the Apr27th weekly 520 Put ay 10.00
Break-Even on Apr 27th weekly expiration:
Profits btwn 560 and 600 make 40.00, stock called away at 600.
Losses of the stock btwn 560 and 550 , protection btwn 550 and 520, and losses below that.
-NO PROTECTION AFTER FRIDAY’S CLOSE.
-LONG HOLDERS WOULD DO THIS IF THEY WANT TO PROTECT AGAINST NEAR-TERM DOWNSIDE BUT ALSO WANT TO PARTICIPATE IN FURTHER UPSIDE, BUT TOO A POINT ($600)
Original Post April 24th, 2012 at 11:16am:
AAPL reports its fiscal Q2 earnings after the bell. The options market is implying about a 7.15% move* which is fairly rich to its 4 qtr avg move of about 4.25%. MAKE NO MISTAKE ABOUT IT, FEAR IS IN THE AIR, AND THE OPTIONS!
*With the stock at ~$560 the April 27th weekly 560 Straddle is offered at about $40, that would be about a 7.15% move to break-even if you were to buy that.
-In the last 5.5 months since Steve Jobs death the stock’s performance has defied logic, gaining almost 80% from the October lows, to the previous highs seen earlier this month, becoming the most valuable company in the world. Since April 10th, the stock is down a little more than 12.5% from it’s all time intra-day high, and the bear case which had previously been dismissed as downright silly has dominated recent trading.
Bears argue that the 3.2m iPhone activations from VZ reported last week and the 4.2m AT&T activations reported this morning make it very tough for the company to hit consensus of of 33m units in the quarter. Sticking with the carriers there has been much debate about AAPL’s ability to still capture large subsidies from the likes of AT&T and VZ as lower priced competitors flood the market with he only real weapon they can compete with AAPL on, PRICE. Lastly with the new iPad launch come and gone, many feel that the next real product cycle won’t be till October when the company releases the “New” iPhone. All this negativity comes at time when investors may have been spooked by a soft patch in U.S. economic data, coupled with some relatively murky guidance by many tech companies, and has caused investors to re-think their $1000 or bust thesis in the name, at least for now.
MY VIEW:
My take is very simple, what goes up must come down, and finally a little sanity entered investors minds….it is no coincidence that the top in the stock coincided with herd like behavior of Wall Street analysts tripping over each other to raise their price targets in the name in early/mid April.
A general rule of thumb, when a stock is up that much in a short period of time and you start seeing headlines of 1000 price targets, it’s usually time to take some money off the table. We might have seen a top to the frenzy, but there will most definitely be another attempt on the previous highs, for the mean time though earnings expectations vs actual results will drive the near-term trade.
This quarter is going to be tricky, it could see very similar characteristics to the Sept quarter in front of the iPhone 4S launch where the company saw a push out in demand and missed on units in front of the launch in late Oct. (for what it’s worth I was purchasing a new MacAir in early March in a very busy NYC store and a salesman let it slip that he had not sold and iPad2 in weeks, that said I went on to lose a lot of money trying to pick a top and short the stock, how dumb am I?).
Even with the stock down 12.5% and trading like crap into the print, the tough trade is obviously to press the short here, if you want to do so, It makes sense to express this view with options in a defined risk manner.
Stay Tuned for our Trade Update on the Iron Condor sale I detailed Friday night on Options Action .http://staging.staging.riskreversal.com/2012/04/20/aapl-just-spotted-the-very-rare-cupertino-condor/
“Great” Expectations:
Q2 EPS: $10.07, Revs: $36.6B, Gross Margin: 44% (company guided to $32.5B in Revs and $8.50 EPS)
-Units: iPhone: 30-33m, iPad: 9-12m, Mac: 4.3m
Q3 EPS: $9.95, Revs: $37.5B, Gross Margin: 44%
FY12 EPS $44.37, Revs$161.1B
Volatility:
-The chart below shows that even while the stock has enjoyed its second straight year of fabulous gains (up about 42% ytd), implied volatility looking out 2 months has shot up to levels not seen since last fall, but the spread btwn 60 day realized vol and that of implied suggests that investors are reaching for options in the name at a pace not see in a while.
The monthly skew chart shows just how jacked the Apr27 weeklies are. Despite that, the ATM straddle is pricing in a move of just over 40 dollars, and given how the stock has been whipping around, sounds about right from a dollar protection standpoint.
Historically the volatility is high. Normally AAPL only moves a little over 4% on earnings. But this time around, given the parabolic move in the stock and then the recent weakness, the options are pricing in more than a 7% expected move:
