Name That Trade $AAPL: Hot Apple Fly

by Dan September 6, 2013 2:11 pm • Commentary

On Tuesday Sept 10th at 1pm eastern, AAPL is holding a media event at the headquarters in California where it is widely believed they will introduce 2 fairly evolutionary iPhones running the new iOS that was previewed back in June at their Developers forum.   While rumors and pictures of the devices have been swirling in the blogosphere for weeks, there is little that is likely to surprise investors and analysts. Except for the fact that the company is supposedly holding a press conference in Beijing where there is speculation AAPL will announce the long awaited distribution deal with China Mobile, the world’s largest wireless carrier with 700 million subscribers, 170 million of which are on their 3G network which AAPL’s new iPhone 5C is assumed to be compatible with.

The China Mobile news got investors excited this week and short dated implied volatility shot up, now pricing a one week move of almost 4% btwn now and next Friday’s expiration.  These relatively high levels of Implied Vol make outright directional bets expensive in the name, and after such a large run off of the July lows, very difficult to make money on the upside.

While the mania surrounding the cult of AAPL has clearly diminished since last September’s all time highs, there are sill many investors (including Carl Icahn) that believe that the days of fabulous stock gains are not behind the company.

For those that think next week’s iPhone events, here in the U.S. and in Beijing, will serve as positive catalysts for the shares and that the company’s fiscal Q4 earnings expected in late Oct (Nov expiration) will be the point at which AAPL management signals a return to earnings growth, then options structures that define risk using some important technical levels are the way to play for a move back to break-even on the year.

Hypothetical Bullish Trade:

AAPL ($497.50) Buy Nov 500/550/600 Call Butterfly for 10.00

-Buy 1 Nov 500 Call for 25.00

-Sell 2 Nov 550 Calls at 9.00 each or 18 total

-Buy 1 Nov 600 Call for 3.00

Break-Even on Nov Expiration:

Profits: btwn 510 and 590 make up to 40, with max gain of 40 at 550

Losses: btwn 500 and 510 & btwn 590 and 600 lose up to 10, with max loss of 10 below 500 and above 600

Trade Rationale:  This is a fairly technical trade idea, and I am using some recent levels from the last year or so to inform my strikes.  The one year chart below shows the stocks recent base at $500 (green line), the white line in the middle is essentially the high for 2013, which should serve as considerable short term resistance, while 600 was a massive psychological level back in November, which when broke saw a $100 drop follow in just a couple weeks.

AAPL 1 yr chart from Bloomberg
AAPL 1 yr chart from Bloomberg


This is not a trade we’re putting on at this time. We’d love to see AAPL pull back a little bit before diving in. But if you were itching to play for the stock to takeout 500 and march higher over the next few months, this is a great structure to do that. It provides a wide range of profitability and doesn’t have the same worries about decay and vol that a comparably priced upside call play would have.