New Trade – XLK: AAPL Still On My “Banned List” But An Alternative Way to Play

by Dan August 24, 2012 2:51 pm • Commentary

Here is a quick preview of what I will be discussing tonight on Options Action on CNBC at 5pm:

AAPL used to be one of my favorite stocks to trade, until early this year when I got it in my head that the price action was far too irrational.  Buying puts, put spreads, put flies time and again got a little costly, and I was late to recall the old market saying “markets can remain irrational longer than you can stay solvent” or something to that extent, well that was almost the case for little ol me.   The stock has pretty much been on a self imposed “banned list” since April.

The stock’s one way action is not something that interests me too much these days, but it’s concentration in most large cap indices and etfs should interest investors who own them, especially if they also own AAPL.  AAPL’s ascent to a $625billion market capitalization has given it the so called run of the roost in etfs like QQQ and XLK where it makes up 20% of the entire weighting in each and a whopping 4.9% of the SPX.

When I am looking for a broad technology sell off, I usually look to express that view in QQQ or XLK to avoid having to make a call on just one of a few names that may move contrary to the broad market for stock specific reasons.  Sometimes I use these instruments for the exact opposite reason as I am doing now, when I want to have the concentration of the top holdings.

For instance, AAPL, IBM, MSFT, GOOG and T (the top 5 holdings in the XLK) make up almost 50% of the weight of the entire etf.  If any 1or 2 of those stocks have a significant than it will move the whole etf.

As we head into September with AAPL just a few bucks from the all time highs, and the world brimming with excitement of all the potential products that the company will release at a scheduled Sept 12 press event, I would suggest that the company will only announce an new iPhone and if it looks or feels anything like the last 2, the stock will get drilled.  This sets up well for a defined risk bet in the XLK rather than playing AAPL alone.  The vol spike this week in the name (color below), and the unusually high short dated call buying in the name this week suggest to me they stock may be at an inflection point.

TRADE: XLK ($30.55) Bought Sept 30/29 Put Spread for .20

-Bought 1 Sept 30 Put for .34
-Sold 1 Sept 29 Put at .14

Break-Even on Sept expiration:
-Profits btwn 29.80 and 29 make up to .80, max gain of .80 at 29 or below
-Losses of up to .20 btwn 29.80 and 30, max loss of .20 at 30 or above

TRADE RATIONALE:  This is a decently convicted play, and I believe offers a fairly reasonable risk reward, especially as opposed to playing AAPL from the short side.  This spread offers a payout of 4x my money if the etf is down 5% on Sept expiration.  I also think the recent enthusiasm heading into a Jackson Hole, FOMC Sept 13 and a ton of Euro stuff will abate in Sept and the markets could be headed for a much over due correction.



Implied vol across all months is an fairly low levels historically. Implied vol averages in low 30’s with spikes into the mid 50’s around big events, and falls to the low to mid 20’s during times following events. (Red is implied vol across all months, yellow is historical IV average)

What’s always interesting in AAPL is the significance it has in retail investing usually produces skew that ramps to both the downside and the upside in near term months. This is probably due to the fact that that ATM premium is intimidating, and retail investors would look OTM for either lotto tickets or disaster protection. (Sept options in green)