New Trade – AAPL: Flat Term Structure Speaks to Fading the iPhone Event in Sept and Buying the Rumored iPad Mini Event in Oct

by Dan September 7, 2012 3:02 pm • Commentary

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

This coming Wednesday, Sept 12, 2012 is the day that AAPL fan boys the world over have waited more than a year for a REAL upgrade to the iPhone 4 that was released in June 2010.  It seems that every new AAPL product release, particularly of the  iPhone variety, are seeing increasing pressure to innovate and create newer, greater products.  I have been on the record suggesting that this is not actually happening, as refreshes to iPhone, iPad and Macbooks have been nothing more than evolutionary over the last 2 years.

But investors don’t seem to care, as they are more focused on the pristine balance sheet that sports more than $120billion in cash and growing, 1.5% dividend yield, rock-bottom valuation for a company expected to grow sales and earnings north of 20% next year off of a massive number and what appears to be an ever-growing ecosystem that many think will bear other category creating products such as integrated TV/pc thingy…..

The stock has been a huge part of most fund managers’ performance and has masked a lot of weakness in other areas of the market, I have long said it will be the last battle fought on any market sell off or sustained bear market, and with the market breaking out to multi-year highs I would expect that to stop unless we get a massively disappointing new iPhone next week.

Technicals:  AAPL broke out to new highs in the middle of August, after about 4 months of consolidation after its high in April.  The most recent breakout has been much more tepid than that which occurred at the start of this year.  The volume has been less aggressive, the momentum of the move has not been as strong, and the stock is still within 5% of its high from April around 644, which should serve as support.  700 is the obvious psychological resistance level, though AAPL has blown past such levels with ease throughout most of this year.

Here is the 9 month chart showing the more tepid nature of the recent breakout:



The 650 – 700 area is the range to watch for potential breaks in the next month.

Volatility: AAPL implied vol across all months is pretty low, but that’s not surprising given the grind higher that the stock has shown since its somewhat disappointing earnings release.

Volatility across the months is pretty flat, as moth months’ at the money vol is trading in the mid 20’s. As we often see in AAPL, within the front expirys, we see both an upside and downside skew as retail investors look to some of the “dollar cheaper” strikes to either buy protection against longs or take a lotto ticket to the upside.



MY VIEW INTO NEXT WEEK’S LAUNCH EVENT:  I fully expect the phone to disappoint lofty expectations, but I can’t tell you that I think the stock gets nailed on the news as investors will quickly focus on the rumored iPad Mini event expected in October.   I will tell you that the flat term structure does set up well for Calendar Spreads if you can identify an expiration that you want to own.  SO I want to Fade the iPhone event and set up for the enthusiasm heading into a much more mysterious iPad “Mini” event in Oct.

TRADE: AAPL (~$682) Bought Sept22nd/Oct 700 Call Spread for 10.50

-Sold 1 Sept22nd 700 call at 6.10

-Bought 1 Oct 700 Call for 16.60

Break-Even on Sept Expiration:

-If stock is 700 or below the Sept 700 Call expires worthless and I essentially own the Oct 700 Call for 10.50

-If the stock is above 700 on Sept expiration I will make the difference btwn the Sept call that I am short and the Oct Call that I am long.

-Max risk is 10.50


Trade Ratioanle/Conviction Level: This is pretty much a vol trade with a slight directional bias, I need to get a few things right to make a good bit of money, but not many things to make a little, but I have defined my risk.  I have put on a half size position and will re-evaluate as I get closer to Wednesdays event.  So for now, I like the set up but reserve the right to change my mind with 2.5 more days of trading until the launch.  Also I put some on today as I want to catch some of the decay in the Sept calls that I sold.

One Last point, a couple weeks back I bought an XLK Sept Put Spread to play for a pull back in tech shares following this event as AAPL makes up 20% of the NDX, this view has not changed. Read here