MorningWord 6/25/13: Investors / traders often convince themselves that when risk assets trade near nice round numbers (to the upside or downside) the underlying has reached an inflection point. AAPL is a perfect example where it seemed like the investing public and financial media was captivated by every hundred dollar mark the stock overcame on its road to $700 this part September. We all know what happened from there, the really big fat round number of $1000 started to be spoken by analysts and investors and then wham. AAPL is obviously a fairly special situation, and to be sure the mania around the stock and the company over the last ten years will be studied by business, marketing and psychology students for decades to come. In hindsight, the excitement around the big figures in stocks like AAPL, GOOG & BRK are a bit silly when you consider if the stocks had done a 10 for 1 split we would spend much less time being fascinated by their rise or fall, and sadly the financial press would have to quote their daily gains of losses in % terms rather than large dollar moves.
So here we are with the stock at ~$400 (after briefly breaking below yesterday), a level that many had thought would be very hard to breach after the stock apparently bottomed following the company’s disappointing Q3 earnings back in April. Just a couple weeks ago it appeared that technical analyst after technical analyst had reiterated the bottom call with the stock’s ability to hold its 50 day moving average for more than just a few days, and many had suggested the stock had made an epic head and shoulders bottom (here).
Despite AAPL shedding the equivalent of the market capitalization of MSFT from last year’s all time highs, there continues to be investors left to sell. I have been in the camp that the stock would most certainly test the April lows based on a whole host of factors, none more important than lack of fundamental catalysts. It is interesting to note that since the company’s introduction of their tricked out capital return plan, many high profile investors suggested that the bottom was in, but in hindsight the increased dividend and buyback did little more than to mask how poorly investors viewed AAPL’s fundamental positioning.
Last week on our Summer Trading Webinar (here), CC and I laid out the one way we would look to play in the near term from the long side with defined risk, but once we see new lows. I want to quick run through it BECAUSE I HAVE GOTTEN A LOT OF QUESTIONS ON IT IN THE LAST COUPLE DAYS.
Theoretical Trade: AAPL ($402) Buy the Jan14 400/500/600 call fly for $21.00
- Buy 1 Jan14 400 call for 33
- Sell 2 Jan14 500 calls at 6.50 (13 total)
- Buy 1 Jan14 600 call for 1.00
Breakevens on Jan14 Expiration:
- At or below 421lose up to 21, with total loss of 21 below 400
- Profits of up to 79 btwn 421 and 579 with max gain of 79 at 500
- Losses of up to 21 btwn 400 and 421 and btwn 579 and 600
If we had to play for a bounce into the expected new products in the Fall, this would be how we would do it. This structure offers very near the money participation on the upside with a massive potential profit range, and most importantly with defined risk.
So for those of you who are sniffin that nice round number in AAPL again (to the upside, $500) and fear the prospect of getting stinky fingers from trying to pick a bottom, look to the options market. We are not there yet, but on next puke, likely into or out of fiscal Q4 earnings in late July we will look to play for a second half Hail Mary.