Our friend John Melloy, the Executive Producer of Halftime Report and Fast Money, highlighted a trade idea from the options research team at Goldman Sachs this morning:
Options Insight: Buy Apple Calls for WWD Conference, 10-June
Apple’s annual Worldwide Developer Conference begins on June 10. We
expect this event to once again be a positive catalyst for shares – this time
driven by refreshes of existing services (iCloud and Siri) and/or a preview
of the new iOS7 operating system. The options market has underestimated
the positive nature of this event in the past. Over the past 10 years, looking
from 10 days prior to WWDC to 1 day after, shares averaged a +5% return
and implied volatility rose by +7% (average). Combined, this drove an
average return on call premium greater than 50%. This year, we believe
that volatility is lower than usual ahead of the event, owing to the recent
$100bn capital allocation plan, making call buying more attractive.
Normally, in the Name That Trade section, we lay out our own ideas. But we wanted to assess the pros and cons of this idea based on our normal inputs.
First, we’ve seen many point out the potential inverse head and shoulders forming in AAPL over the last few months. Rich Ross and I debated the merits of AAPL in the near-term based on the technicals on the Closing Bell yesterday (video here). Greg Bender, Bloomberg technician extraordinaire, pointed out the same pattern this morning, by way of Arthur Hill at stockcharts.com:
I’m of the view that the 460-470 area is more likely to act as resistance, and don’t expect a breakout, but either way, it’s a crucial area for the stock.
As for implied volatility in AAPL (red below), it does look a bit cheap given the recent high level of realized volatility (blue):
However, option traders are in the anticipation business, and I’m still of the belief that AAPL is in a range between 420 and 470, in which case, buying options in either direction is likely not going to be a winning trade. But as always, there are many others willing to take the other side of my view.
My main plan on AAPL is to wait for a pullback to the 420 area for a longer-term bullish entry that targets 500. Maybe we’re already headed to 500 and I don’t get that entry, and so be it if that’s the case. In the meantime, watch 460-470 in AAPL, as traders position on either side in anticipation.