Name That Trade: $AAPL – Catch A Falling Knife Edition

by Dan April 19, 2013 1:31 pm • Commentary

It seems like everyone and their mother is trying to pick the exact spot where AAPL is going to bottom.  Obviously this is a bit of a fools errand (see my comments on my own bottom picking below from Wednesday), and you know the old saying about getting stinky fingers when you try to do so…..This is where the use of options come into to play, using defined risk strategies in an effort to dip your toe in the water so to speak, without having to draw a line in the sand.  As I said below, AAPL’s price action this week (down a little over 8% since last Friday’s close) is approaching panic, and a negative response to AAPL’s Q2 results on Tuesday could be the exact capitulation set up for the stock.  On Fast Money on Tuesday I suggested that $370/$350 range would be the “Buy of the Century”, largely because $350 would mark a 50% peak to trough draw-down from the all time highs, and would place their cash on their balance sheet very close to 50% of their market cap.  At some point soon, something will have to give.

On Monday we are hosting a Webinar at 4:15pm est where Enis and I will thoroughly run through the bull/bear debate, and debate trade structures that we are considering employing for the earnings event (register here), but in the meantime, I want to lay out a longer term structure that I am considering putting on at the next point that I think the stock has gotten washed out.

Regular readers of the site have seen us use Butterflies in the past, normally for situations where we would be inclined to do ratio spreads, but we turn into a fly for risk management and margin reasons.  IN some instances we use them as structure to essentially sell premium, or define a range (read discussion here), but in the Butterfly below, I am merely looking for the lowest premium structure with defined risk to offer a wide range of profitability.  TO BE CLEAR THIS IS NOT A TRADE I AM PUTTING ON NOW, WILL CONSIDER ON A NEW LOW IN THE COMING DAYS.

Theoretical Trade: AAPL ($395) Buy Jan2014 400 / 500 /600 Call Butterfly for ~18.00

-Buy 1 AAPL Jan14 400 call for 40.00

-Sell 2 AAPL Jan14 500 calls at 12.50 each or 25.00 total

-Buy 1 AAPL Jan14 600 call for 3.00

Break-Even on Jan14 Expiration:

-Profits of up to 82 btwn 418 and 582, maximum gain of 82 at 500

-Losses of up to 18 btwn 400 and 418 and btwn 582 and 600, with max loss of 18 below 400 and above 600.

Trade Rationale:  In any trade that I am committing long premium to, I need to establish some potential catalysts, and give myself enough time and a wide enough range so that I have time to have the thesis play out.  I will likely chose Jan14 so that I can capture new products in the fall and 2 additional earnings event.  I will likely choose the fly to reduce my premium outlay by selling 2 of the middle strike in an effort to widen the range of the spread as opposed to just a one up call spread.  This trade structure is almost a set it and forget it sort of trade as I will risk what i am willing to lose.  The main point though is that this structure gives me time and room to participate on a turn in sentiment, without having to worry to much about the near term volatility.

The choice of strikes is dictated by the technicals.  Here is the 3 year weekly chart:

[caption id="attachment_24983" align="alignnone" width="634"]3 year weekly chart of AAPL, Courtesy of Bloomberg 3 year weekly chart of AAPL, Courtesy of Bloomberg[/caption]

The 200 week moving average is around 372.  Previous support from 2011 is around 360.  That’s why this area feels good for a long delta trade.  As for resistance, the most obvious upside resistance is around 500, which should be tough to breach.

The main point here is that when I pull the trigger, I will do so without having to worry about owning shares in a name where clearly a bubble is bursting.  Trying to nail the exact bottom won’t be easy, and if you are looking to buy on a puke and catch a quick 5-10% turn, this is not the trade structure for you.

Please tune in on Monday night for our webinar at 4:15 pm and we will run through our thoughts in greater detail and outline other ways we care considering playing earnings and for playing off of a potential bottom.

Reminder: Enis and I will be Hosting a Free Webinar on Monday April 22nd at 4:15pm EST previewing AAPL’s Q2 earnings report and we will debate 2 options trade structures that we are considering to play the event.  Register here:


MorningWord 4/18/13:  $AAPL – Generational, Eh, V Bottom Maybe. The Impending Capitulation Should Be Bought

Last night on Fast Money the crew had one of our infrequent discussions about AAPL, specifically what the company needs to do and say when they report their fiscal Q2 on Tuesday to allay investor fears that the company’s best growth and innovation are behind them.   Yesterday’s price action in the stock, down 5.5% and making a new 16 month closing low, was downright horrendous and for the first time on its descent I will suggest that it neared capitulation, capping an almost 43% decline from the all time highs made in September.

Yesterday in his Chart of the Day, Enis overlaid AAPL’s run over the last 5 years to that of MSFT’s performance  from 1996 to 2001 during its own rise and fall from cult growth stock to downtrodden value stock.  This comparison may be fairly constructive from a technical perspective as investors try to get their arms around what this transition can look like for a large cap tech stock.

From a fundamental standpoint, AAPL’s challenges are well known and I will summarize a post from Henry Blodget on Business Insider on the topic on Tuesday (here):

  • Apple’s earnings are no longer growing.
  • Several reports have suggested that orders for Apple’s key product, the iPhone, will be weak this quarter and next quarter
  • Apple refreshed its entire product line last fall, and we’re still in the middle of a new-product blackout period.
  • Apple’s amazingly high profit margin is declining and is likely to continue to decline over the next several years.
  • One of Apple’s next revolutionary new products — a TV or TV device of some sort — always seems to be about a year away, with the expected date of release perpetually getting pushed farther into the future.
  • The smartphone market, which has driven Apple’s spectacular iPhone sales over the past 5 years, has entered a new phase, in which low-priced phones are capturing most of the market share.
  • Apple’s competitors have caught up in smartphones and tablets (and now, possibly, in prospective TVs and watches), so Apple no longer has the leverage with distributors and consumers that it once did
  • Lastly, Apple really has finally entered the “post-Steve Jobs” era, and it remains to be seen how successful the company’s next generation of leaders and products will be.

OK so none of these reasons should be new to any of us AAPL followers, but they are the reasons that were discounted during the stocks ascent from $400 to $700, defended from $700 to $500 and now could be the catalyst to own the shares below $400 as the company aggressively tackles each issue one by one.

Last night on the show I said that I think the Stock will be the “Buy of the Century on the next Puke”.  My friend DrJ of OptionsMonster tweeted it out and we got a fairly funny response by many as to my verbiage.

Dan Nathan  RiskReversal  on Twitter

The main point I was trying to make is that here is a company that went from being the most valuable company  in the world in September, making what I think is safe to say the best computing products for the highest profit  margins ever for such devices, to basically not, in a matter of 7 months.  I have not tried to pick a bottom in the stock, because I have had the strong belief that it will not bottom until max pain has been realized by almost every investor during what I will call its “bubble phase” of 2012.  We are almost there – the stock has basically round-tripped the entire move since investors once contemplated what a Post Jobs AAPL would look like shortly after the founder’s death.

But at ~$400 the stock is finally getting really really cheap,  with a ~$380 billion market cap, about 40% of that is in cash on their balance sheet, and is equal to their sales in 2012.  As Scott Krisiloff wrote on his blog yesterday (here):

the enterprise value of the company has shrunk to levels which value the company at around the same price as three of its most comparable competitors: GOOG, MSFT and Samsung.  On a market cap basis, Apple still looks like its worth significantly more than its competitors, but that’s mostly because the cash pile is so unfathomably large that it skews the whole market value of the company.

Does Apple the enterprise deserve to be worth less than Google, a company that does 1/3 of its revenue?  Only time can tell.  Mathematically though as cash becomes a larger and larger percentage of Apple’s market value, each additional percent decline in the share price means a bigger and bigger discount to the value of Apple’s business.

So I am not calling for a “generational bottom” or that the stock will re-take its past highs anytime soon.  I am simply saying that if the stock pukes, I used $375 in the near term, but the real technical range of massive support in my opinion is $350-375, I think there is a strong chance that could be the bottom once most of the bad news is realized (a miss slight miss to Q2, and downward guidance for Q3 and a only a modestly generous cash distribution plan, and of course no talk of new products).  At that point I will likely start dipping my toe in the water by selling a put spread (defined risk bullish strategy to take advantage of heightened volatility levels that will most certainly exist at those depressed price levels), and look to enter a long stock position with an intermediate term time horizon playing for what could be the mother of all V Bottoms on a Puke (puke meaning capitulation, down 5-10% from current levels, touching my line in the sand technical support level). IN full disclosure I was not a fan of AAPL in early 2012, prior to its parabolic run (read here) and almost every reason I cited in that post were the very reasons that ended up taking the stock down, after it rose almost 75% (yes I suck), so timing is certainly very important, and just because I nailed the reasons why the stock would eventually fall out of investors favor, I didn’t help the fact that I lost money routinely trying to be right before it was time, so to speak!  I am trying to be a bit patient on the flip-side and will wait for the opposite of the feeling I had on Sept 21st when AAPL touched $705.