Event: AAPL reports fiscal Q1 earning tonight after the close. The options market is implying about a 7% move following the results vs the 4 qtr avg move of about 5%. With the stock about $500 the Jan25th straddle is offered at ~$35, of if you were to buy that you would need a $35 move (or ~7%) above or below $500 on Friday’s close to make money.
Historical Earnings Moves:
| eps est | reported | % move | |
| 10/25/12 | 8.75 | 8.67 | -0.9% |
| 7/24/12 | 10.37 | 9.32 | -4.30% |
| 4/24/12 | 10.05 | 12.3 | 8.90% |
| 1/24/12 | 10.13 | 13.87 | 6.20% |
| 4 qtr avg | 5.1% | ||
| 10/18/11 | 7.35 | 7.05 | -5.60% |
| 7/19/11 | 5.87 | 7.79 | 2.70% |
| 4/20/11 | 5.43 | 6.4 | 2.40% |
| 1/18/11 | 5.4 | 6.43 | -0.50% |
| 8 qtr avg | 3.93% |
Sentiment: Wall Street analysts, at least from a ratings standpoint, remain fairly Bullish on the stock with 52 Buys, 9 Holds and only 2 Sells with an average 12 month price target of ~$716. Short interest sits at a measly 2% of the float. Sentiment heading into this quarterly report maybe the most negative in recent memory, as analysts have been falling over each other to temper fiscal Q1 estimates and price targets since the October earnings release which disappointed on almost every major metric. To highlight this, the chart below shows the dramatic fall off in Q1 estimates as the company guided below Wall Street consensus (red line = Q1 2013 consensus estimates).
[caption id="" align="aligncenter" width="490"]
from Bloomberg[/caption]
Technicals: On the 1 yr chart below of AAPL, I have drawn the line in the sand so to speak, the horizontal red line at the all-important $500 support level. The purple line shows the 50 day moving average, and I’ve highlighted with circles the 3 times over the past 3 months where the 50 day ma has acted as resistance.
[caption id="attachment_21819" align="aligncenter" width="490"]
AAPL 1yr chart from Bloomberg[/caption]
The 50 day moving average is now just below the 550 level, which is the main resistance level here as well. As I said in my Call Fly trade post on Friday, the set up on so many levels in front of the Q1 print is treacherous for traders. There is very little from a technical perspective that speaks to holding the $500 level, which is why the only thing that can really turn the tide is better than expected fundamental news.
Fundamentals:
Positives:
- Fortress balance sheet with over $120 billion in cash, no debt, expected to generate more than ~$10 billion in cash per quarter in fiscal 2013.
- Stock trading at ~10x 2013 expected earnings and 9x 2014. The company has a dividend yield of 2.1%.
- In the last 4 months, the company has refreshed almost every major product lines as they headed into the all important holiday selling season
- A few potential positive catalysts include AAPL inking a distribution deal with China Mobile (who has 700 million subscribers), expected dividend increases/stock buybacks, and the “white whale” that is AAPL TV.
Negatives:
- Following the product refreshes investors will closely scrutinize the degree of gross margin compression in their key iOS product portfolio.
- As evidenced by the plethora of competitive products recently released at the Consumer Electronics Show last week in Las Vegas, AAPL is being attacked on many fronts, with higher quality products that call into question the company’s ability to continue their past rate of innovation.
- The Law Of Large Numbers may finally be settling in for a company that has shown dramatic growth over such a long period of time.
Volatility: The chart below shows that the 30 day realized volatility (white line) and the 30 day implied volatility (blue line) are both near their 2 year highs, in the 35-40 range. Normally, this would seem like a good area to sell implied volatility overall based on the 2 year history. Options traders have obviously changed their overall view on AAPL’s volatility since the trend changed in the fall. If the stock does stabilize however, implied volatility has quite a bit of room to fall.
[caption id="attachment_21828" align="aligncenter" width="490"]
30 day implied vol vs 30 day realized vol from Bloomberg[/caption]
Expectations From Bloomberg By Beth Mellor:
ESTIMATES:
- 1Q EPS est. $13.52 (range $12-$16.10; avg. est. up 1.4% over past four weeks)
- 1Q rev. est. $54.83b (range $52.01b-$59.55b; avg. est. up 0.6% over past four weeks)
- 1Q gross margin est. 38.6% (range 36.7%-41%)
- 2Q EPS est. $11.77 (range $9.49-$12.94; avg. est. down 3.6% over past four weeks)
- 2Q rev. est. $45.81b (range $38.76b-$50.12b; avg. est. down 2.5% over past four weeks)
- 2Q gross margin 40.6% (range 37.8%-43.5%)
UNIT BREAKDOWN:
- 1Q iPhone unit est. 47.8m (range 43.1m-53m, 13 ests.)
- 1Q iPad unit est. 22.4m (range 18.4m-26m, 13 ests.)
- 1Q Mac unit est. 5.1m (range 4.8m-5.35m, 9 ests.)
- 1Q iPod unit est. 11.4m (range 9.6m-13.4m, 8 ests.)
MY VIEW: Many of you think I probably sound like a broken record, but the days of AAPL growing earnings 75% or even 100% a year, which it has done in the last 3 years is over. The company has grown sales from $36 billion dollars in fiscal 2009 to the expected $189 Billion in fiscal 2013, the days of earnings growing 20% plus are over.
This quarter and Q2 guidance are of particular significance because investors will get a very real sense for the magnitude of the earnings deceleration. Analysts expect a Q1 and Q2 year over year decline in earnings for the first time since 2003. The shareholder base is obviously shifting from growth investors to value, but it appears that retail investors are still hanging on to the dream that once was $1000 12 month price targets.
The set up into the print is far from easy. I have a defined risk long trade (below) because I feel the stock is a bad press on the short side here. I am very aware that if the company misses already low expectations and guides down fiscal Q2 below consensus, the stock will likely go strait to $460, maybe even $450, the retail puke has yet to happen…….on that puke though expectations for 2013 are probably low enough where the stock from an outright long basis (non fancy options structures) would make sense a lot of sense given the dramatic 4 month under-performance to the broad market.
I have chosen a structure that I think offers the best risk reward to play for a move higher in line with the implied. I am risking $3 to make potentially $22 if the stock goes to and settles near resistance on Friday’s close. This is a trade, not an investment, I am risking what I am willing to lose.
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Original Post Friday, Jan 18th, 2013: New Trade $AAPL: Long Premium Trades Into Next Week’s Print Look Treacherous, But…
Earlier this week, Enis and I did a fairly deep dive Webinar (below) on how we were thinking about the setup into AAPL’s Q1 earnings slated for Wednesday, Jan 23rd after the market close. We ran through many of the inputs we use both from a qualitative and quantitative perspective to arrive at our trade structures, and frankly not much has changed since Monday.
The implied move for earnings (Jan 23rd post close) has ticked up a tad though, now about 7% (with the stock at $500 the Jan25th 500 straddle is offered at about $38, or a little over 7%). So here’s the trade:
My thought here is that the implied move makes sense from the standpoint of the stock’s massive relative weakness, recent sentiment shift and all of the uncertainty surrounding the rate of decelerating growth. As a trader, my sense is that the sentiment shift of late is a bit overdone, and while the stock could still see $450 on a meaningful Q1 miss and guide below current consensus, I imagine buyers would step in at levels that represent a round trip of the historic 12 month run.
While investors want to look out past the recent weakness, and anticipate catalysts such as share buybacks, increased dividend, distribution deal with China Mobile and the entrance into a new category such as TVs, the trader in me wants to just isolate next week’s event.
While in some ways I would love to see the stock just completely fall out of bed, I think the greater likelihood is that much of the potential bad news from the earnings is priced into the stock at current levels.
I want to make a defined risk play that the stock bounces on better than expected results. As I indicate in the title of the post, long premium structures on the whole look like a difficult way to make money as the implied vol has been elevated for weeks now, and will most certainly see a substantial decline. In many ways the best trade on the board is likely to sell vol, but we will wait right before the event to identify the proper structure.
With less than two and half trading days to the print, and a long weekend in between, I need to be cognizant of how I choose establish a long premium position. This is where Butterflies come in. If I were back trading at a bank, I would likely choose to buy a 1×2 call spread or a call tree, but because I have to be cognizant of naked short positions and margin, I will look to cover my wings.
I AM PUTTING THIS TRADE ON VERY SMALL, AS I AM RESERVING MY RIGHT (SO TO SPEAK) TO CHANGE STRIKES CLOSER TO THE PRINT.
TRADE: AAPL (~$500) Bought the Jan25th 525 / 550/ 575 Call Butterfly for 3.00
-Bought 1 Jan25th 525 call for 8.80
-Sold 2 Jan25th 550 calls at 7.25 or 3.625 each
-Bought 1 Jan25th 575 call for 1.45
Break-Even on Jan25th Expiration:
-Profits btwn 528 and 572 with max gain of 22.00 at 550.
-Losses of up to 3.00 btwn 525 and 528 and btwn 572 and 575, with max loss of 3.00 below 525 and above 575
Trade Rationale: I like the idea of isolating that 550 strike on the upside as I think the stock could struggle there as it has recently. This trade works well after the announcement on any move higher towards 525 and above, and has enough room to still stay profitable if AAPL surprises everyone and the stock makes a big upside move. If the selling pressure continued in the stock and we saw 400’s after earnings, I’m only risking 3 dollars, something that was worth the shot.