AAPL: Dollar Cheap Weekly Options Provide Risk Management Opportunities For Longs Into Wednesday’s iPhone Event

by Dan September 10, 2012 12:10 pm • Commentary

I’m going to be calling into the Fast Money Halftime Report today on CNBC btwn 12:30 and 1pm, here’s a preview of what I’ll be talking about

Ok here is my latest attempt to get as much hate-mail as possible from the intensely loyal AAPL shareholder base.  But in full disclosure I have no axe to grind here, I think AAPL is a great company, that makes great products and I wouldn’t be surprised if the stock someday finally trades at the $1000 price target that so many of the Wall Street Analysts seem to be gravitating towards.  I am not short the stock and have no strong interest in it going lower, on Friday on Options Action on CNBC I detailed a Calendar trade that I placed the same day where I sold Sept 700 Calls to Buy Oct 700 calls, with my goal that AAPL stays below $700 by Sept expiration and then rises above it in Oct.



Wednesday’s Event:

At some point, AAPL will massively disappoint on consumer and investor expectations as it relates to innovative products, and not to sound like a broken record, but the risks to owning the stock on a near term basis into such product releases obviously increases as the stock continues to trade at all time highs.  This event and set up is a perfect example in my opinion.  I get it, the stock is the source of massive gains, and thus has warranted massive loyalty among shareholders.  The company’s fortress balance sheet with $120 billion in cash, 1.5% dividend yield and rock bottom valuation for a company with their expected growth and size is unprecedented, so I get why no one wants to sell.

But, as usual, speculation regarding iPhone5, iPod Nano, iPad “Mini” and a potential AppleTV are all reaching fever pitch, and it seems like with most recent Apple product announcements the internet speculation, mostly derived from leaked images from suppliers in China, has taken away a lot of the mystery of the new iPhone.  The company has not had a meaningful iPhone upgrade since the release of the iPhone4 in June 2010, if this phone is more of the same, but with 4G, better and bigger screen display and minor software upgrades to iOS, I have to assume there will be some disappointment.

If you have gains, and almost all holders do with the stock only 1.5% from all time highs, but you are nervous for the potential for the disappointment of very high expectations heading into Wednesday’s launch event, buying weekly Puts to protect long could make sense as they appear to be “Dollar Cheap.”  For example,with the stock at ~$675, the Sept weekly 665 Puts are offered at ~$5.50, or less than 1% of the underlying stock price. Buying those Puts offers protection down ~2%.   This way you participate on any gains, but you have basically drawn a line in the sand about how much risk you are willing to take.

Generally I am not a fan of suggesting to shareholders to buy Puts against long stock, because synthetically that is just like owning a call, but in this instance given the potential uncertainty, and the fact that everyone and their mother owns AAPL (even if you don’t outright, it is 20% of the NDX and 5% of the SPX and sits in a ton of mutual funds) at some point from an all time high the music will stop, even if its just temporarily, and those who don’t want to be there for the last game of musical chairs may benefit from occasional put purchases when they start to “feel it in their plums” so to speak.