When I initiated this bearish position in the QQQ (below) almost 3 weeks ago, my sense was that AAPL would continue to flounder, and eventually break the mid November low, and ultimately some other large cap tech components of the index would follow suit. AAPL is down about 3.5% in this time period, yet the QQQ is still higher than where I initiated the position, suggesting AAPL’s large weighting in the Nasdaq 100 is being overcompensated for by some of its tech brethren… until Yesterday. One of the Nasdaq’s main horsemen, AMZN, finally started to show some signs of strain after coming within 2% of the all time high in the stock. AMZN’s nearly 4% decline yesterday could have been explained away by purely fundamental reasons associated with broader retail weakness or some less than flattering stock specific news, but the WHY may be as simple as Gravity, what goes up eventually must come down. Especially in a year that has seen one high-flier come apart after another (AAPL, CMG, PCLN, HLF to name just few). If the next few days brings a new 10 month low in AAPL, we could see some other Tech high-fliers follow suit. Despite all of that this position is currently a losing one and is running out of time.
With that in mind and only a few actual trading days left until the Dec 31st expiration it’s a good time to consider our options for the position. With the QQQ trading this morning at about $64.43, the QQQ Dec31st 64/6 2 spread can be sold at about .30 for a .25 loss.
Option One: Cut losses, sell the spread out now and take the loss.
Option Two: Hold on until Monday, playing for a decline in tech into the year end at least try to get out for even
Option Three: Roll out into New Year
We’re undecided on this for now but will try to get a sense if it’s possible for any follow through action from yesterday or any chance of craziness caused by the negotiations in Washington. We’ll update on the site when we make a move.
Original Post Dec 7th, 2012: New Trade $QQQ – What Happens to the Rest of Tech if AAPL Breaks Below $500 by Year End?
The euphoria around AAPL’s stock has clearly broken, the rose colored glasses that so many investors and analysts have worn for so long, no longer offer the same orgasmic hue. Institutional investors have been hip to this for months now, as the selling by the “smart money” started on the very day that AAPL launched their iPhone on Sept. 21st. While that all sounds a bit snarky, I don’t for a second mean to denigrate the company and their products, in the last 2 months I have bought 2 iPhones 5’s and 4 iPad Minis, and I couldn’t be happier with them. They are best in show, for now. I am not going to use this post to go through the issues that I believe face AAPL as a company and as a stock in the intermediate term (I think there are many, none less important than the margin compression and 2 consecutive earnings misses, or the recent release of the above mentioned products that I believe to be purely evolutionary, rather than revolutionary as had been customary during the stocks historic 10 yr run), but I want to use this space to talk about why I think the stock can make a new low below $500 in the coming days/weeks prior to year end and offer a lower risk way to play.
First and foremost, just as the stock overshot on the upside it is very likely to do so on the downside for reasons that don’t exactly make fundamental sense. Everyone on the planet knows they have $120 billion in cash on their balance sheet, generate tons on a quarterly basis, offers a 2% dividend yield, trade below a market multiple for double digit earnings growth, etc, etc. And that’s all great. Those were all the reasons the stock went up for years, and they can all still be intact on the way down. This comes down to a couple simple facts, investors (both institutional and retail alike) still have too much concentration in the name, and the stock’s gains have masked a lot of under-performance in other areas. Investors need to lock in profits especially as they consider higher capital gains taxes going forward.
So as the news media and investors and about anyone on a street corner or water cooler this week are trying to figure out why the stock is down 25% from the highs and 8% this week alone, it’s obvious to us that it’s because the fever has broken. The AAPL bubble is popping and the stock could very likely make a new low soon.
MY TRADING VIEW: I don’t want to press AAPL here on the short side for a new low because there are few cheap ways to do it and the low could be tough to get out on. With defined risk one could sell a Jan Call Spread, but given the stock’s recent rally from the Nov 16th lows of $505 to about $595, I’ll pass. But I do think a decent way to play is through QQQ options. While AAPL makes up 17% of the QQQ, the top 8 holdings, all large cap tech (MSFT 7.5%, GOOG 6%, ORCL 5%, AMZN 3.8%, QCOM 3.6%, CSCO 3.5%,INTC 3.4%) make up about 55% of the entire index. While many of the above under-perform the Nasdaq, AMZN and ORCL still massively out-perform ytd and maybe just maybe investors look at their gains in a few of the above into year end with a similar bit of skepticism as they have with AAPL.
While a compromise on the “fiscal cliff” could cause a temporary short squeeze, I think there is a good chance that that squeeze is already happening and resolution will be a “sell the news” moment.
Vol Snapshot: Our preference for using QQQ options as opposed to AAPL options comes down to the simple fact that AAPL options look expensive, and QQQ options look much cheaper on a relative basis. Yesterday’s CotD post by Enis included this chart, comparing AAPL implied to realized volatility over the past 2 years:
The red line shows 30 day implied volatility for AAPL, which is near the highs of the past 2 years. In contrast, here is the same chart for the QQQ:
The QQQ implied volatility is still near the lows of the last 2 years, despite AAPL’s recent volatility, as the other components have held up much better. As a result, QQQ options are a much cheaper way to play for a break of 500 in AAPL, without paying the expensive premiums that are found in AAPL options.
TRADE: QQQ ($64.95) Bought the Dec31st Quarterly 64/62 Put Spread for .55
-Bought 1 QQQ Dec31st Quarterly 64 Put for .95
-Sold 1 QQQ Dec31st Quarterly 62 Put at .40
Break-Even On Dec31st Quarterly Expiration:
-Profits up to 1.45 btwn 63.45 and 62, max gain of 1.45 below 62 or about 4.5% lower
-Losses of up to .55 btwn 63.45 and 64, with max loss of .55 above 64.
Trade Rationale: While I think long premium directional trades in AAPL (like pressing the short down here) is a fool’s errand, pressing for a break through the more diversified QQQ offers a better risk / reward, if you are in the mindset the stock breaks last month’s lows and takes some of its large cap tech brethren with it, QQQ is a safer way to play.
CONVICTION LEVEL MEDIUM, ENTERING 1/2 POSITION SIZE TO START.