New Trade $AAPL – Playing Sentiment Shift For a Near-Term Bounce

by Dan November 9, 2012 10:15 am • Commentary

The sentiment shift in AAPL over the last month and half has been fascinating to say the least. From the Euphoric all time highs (~$705) on the day of the iPhone release on Sept 21st, to this morning’s six month lows in the stock, down ~25% from the highs.  We have been fairly cautious on the stock for a while now, we had been wrong on the price action, and frankly pulled the plug on losing bearish trades in the Spring, but the reasons for our previous caution are now starting to play out (and there are a lot of them).  Now that we can’t find a single pundit who wants to buy it, analysts who have gotten a tad more cautious, and investors acting a bit panicky we want to take a shot that the stock might have made a short term bottom and play for a very short term bounce.  

TRADE: AAPL ($541 ) Bought AAPL DEC 570/600 1×2 Call Spread for .70

-Bought 1 Dec 570 Call for 13.90

-Sold 2 Dec 600 Calls for a total of 13.20 or 6.60 each

Break-Even on Dec Expiration:

-Profits of up to 29.30 btwn 570.70 and 629.30, max gain of 29.30 at 600.

-Losses of up to .70 btwn 570.70 and 570, and btwn 629.30 and 630, loss of .70 below 570.   Short stock above 630.


TRADE RATIONALE:  While we are strongly in the camp that the days of AAPL’s parabolic moves are over, we think there is a distinct possibility that there is one more run this year left in the stock, probably back to what should serve as fairly decent resistance at $600.  The set up looks fairly decent here, as the company has recently come under significant scrutiny from a whole host of issues ranging from their recent results and guidance, product mishaps and availability, management shake-up, and general questioning of their ability to keep innovating at the same pace of the last 10 years.  For all of those reasons we think the stock will likely be range bound for a year or 2, but at this point we want to make a relatively defined risk bet (risk above $630 that I become short)  that the stock makes a near term bounce and move back to what we think may be the high end of the range going forward.

As with all unbalanced spreads, margin can be an issue. This trade can be turned into a butterfly by buying a higher strike call, like the 650’s but the risk reward of the trade obviously gets worse in that scenario, but the margin requirements are solved.