Adult Swim Trade $AAPL: Selling the Implied Move

by Dan October 28, 2013 3:34 pm • Commentary

As I stated in our quarterly preview (below) and the Name That Trade post from earlier this afternoon (here), the Sept 23rd statement from the company suggesting that revenues and gross margins will be at the high end of the previous guidance should take a little bit of the mystery out of tonight’s earnings release.  Obviously Q1 guidance will be the driver, but with the implied move in the options market at a whopping 6%, an out-sized move  similar to those witnessed by AMZN last week (up 9.4%) and GOOG 2 weeks ago (up 13.8%) seems a bit hefty for a company like AAPL with a $480 billion market cap.  To put a 10% move for AAPL in context, it would be almost equal to the size of PCLN’s entire market cap.

My sense that the Icahn’s presence puts little floor on the stock on any disappointing guidance, probably back to the $500 range, while strained availability of iPhone 5S and iPad Mini Retina could cause guidance to be a tad more subdued than some bulls hope.  With this in mind, and without an inclination to make a directional bet after the stock’s 18% run since mid Sept I want to make a defined risk play that the stock will be range-bound this week.  Levels that we identified below in our preview could serve as a guide: $500 as near term technical support on the downside, and $555 the 2013 high as near term technical resistance on the upside.

The trade that I am doing in fairly small size is a bit of an adult swim and could be educational for some newbies to options trading. I am going to define the range for the balance of the week, with defined risk, and look to sell the implied move as I feel the Sept 23rd pre-announcement should take some excitement out of the whole thing. So here’s the trade:

TRADE: AAPL ($529) Sold Nov 16th 500/490– 565/575 Iron Condor at $4.00

AAPL Sold Nov 16th 500/490  Put spread at 2.50

  • Sold 1 Nov 16th 500 put at 7.50
  • Bought 1 Nov 16th 490 put for 2.50


AAPL Sold Nov 16th 565/575 Call Spread at 1.50

  • Sold 1 Nov 16th 565 call at 5.65
  • Bought 1 Nov 16t 575 call for 4.15

Break-Even on Nov Expiration: If stock is between 500 and 565 collect the entire 10 dollars for a 4 dollar profit. Losses of up to 6 dollars if above 565 or below 500, total loss of 6 dollars below 490 or above 575

Trade Rationale: Because this is a 10 dollar wide structure, your max risk is 6. So the best way of thinking about this trade is risking 6 to make 4 on a fairly high probability. But do know that if AAPL surprises on way or the other that 6 dollars is at risk.




Original Post Oct 27th, 2013:   $AAPL Fiscal Q4 Earnings Preview

Event: AAPL will report their fiscal Q4 earnings Monday after the close.  The options market is implying about a 6%* one day move vs the 4 qtr avg of ~4.66% (which is a tad misleading  when you consider the stock’s 12.35% decline on their fiscal Q1 print back in January) and the 8 qtr avg of ~5.5 %.

*The Nov 1st 525 Straddle (the call + the put) went out offered Friday at about $34, if you bought that on Friday’s close you would need a $34 move in either direction by Friday Nov 1st at 4pm to break-even. With earnings coming Monday after the close, long weekly options to make money off of a move will become fairly challenged once the stock settles after the initial move.

Sentiment:  Wall Street analysts remain very bullish on the stock with 47 Buys, 14 Holds and 4 Sells with an avg 12 month price target of ~$552.  This compares to 49 Buys, 14 Holds and 3 sells with an avg 12 month price target of ~$528 when the company reported their fiscal Q4 results on July 23rd.

Short interest sits at about 2% of the float, down from the 3% level 3 months ago when it was near its highest level in the past 5 years.

Options Open Interest:  As usual for AAPL, calls handily outnumber puts in open interest.  About 1.86m in call open interest, vs. around 1.07m for puts.  Recent activity has been in line with AAPL’s history during 2013 – the call to put activity ratio over the last month is about 1.82.  The 4 largest lines of open interest are all in Jan14 with 67k Jan14 500 calls, 64k Jan14 600 calls, 44k Jan14 550 calls, and 36k Jan14 700 calls.  The single largest line of open interest in puts is the Jan14 500s with 27k.

Implied Vol Snapshot:   Despite creeping up a little more than 10 points in the last few weeks, implied vol is a tad lower than where it has been prior to earnings over the last 8 qtrs.   This is the obvious result of the company’s Sept 23rd pre-announcement of a sales and gross margin range that came in at the high end of previous guidance.

AAPL 30 day at the money Implied Vol (blue) vs 30 day realized vol (white) from Bloomberg
AAPL 30 day at the money Implied Vol (blue) vs 30 day realized vol (white) from Bloomberg

Even though IV isn’t as high as some recent earnings cycles, November vol is about 39 and is likely to get crushed to at least the mid 20’s following the event. Any earnings options strategy has to account for what will happen to the November IV.  

Price Action / Technicals:  On Thursday, for the first time since the first week of the year, AAPL was essentially back to unchanged year-to-date before giving back 1% in Friday’s session.  The recent strength comes after a period of fairly dramatic investor disappointment with the new iPhones (the stock sold off 10% in the week after the launch event) only to have product sentiment reach a sort of equilibrium with the recent release of the new iPads (which for all intents and purposes were also disappointing, despite the stock’s rally following the event).

The one year chart below shows what could be a fairly symmetric support/resistance set up.  With the stock up 17% from the September lows, the stock could be running out of gas near the break-even level for the year.  $500 (read line) could serve as decent near term support, down about 5%, not far off from the implied move for the event, while the yellow line, back at $450 should serve as massive long term support, this was the level the stock just bounced from prior to Carl Icahn’s Tweet about his stake, and the level the stock stopped on a dime at back in mid Sept after the iPhone launch event.  On the upside, the 2013 high of the year of $555 should serve as the next level of resistance once the stock gets back above break-even, with many options traders eyeing that $600 level (open interest of 64k Jan14 600 calls).

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


Q4 & Q1 Expectations:  In an effort not to re-invent the wheel, I decided to crowd source a bit of this from some trusted and reputable peeps on AAPL.

Here is a nice consensus estimate roundup for AAPL’s EPS, Revenue & units by product by Philip Elmer-Dewitt, editor of the Apple 2.0 Blog on

courtesy of
courtesy of


Metric Preview from @SammyWalrusIV who writes the APPL Orchard Blog:

AAPL 4Q13 Preview; Expect a Beat

Revenue: $37.6 billion (AAPL guidance: high end of $34-37 billion range/Consensus: $36.8 billion)

  • I expect Apple’s revenue to increase 4% year-over-year.

Gross Margin: 37.1% (AAPL guidance: high end of 36-37% range/Consensus: 36.9%)

  • I expect Apple’s margin to increase sequentially to 37.1% from 36.9% last quarter, reflecting a modest boost from the newest iPhones. Management’s margin guidance is approximately 300-400 basis points less than the 40.0% margin reported in 4Q12.

EPS: $8.20 (Consensus: $7.93)

  • I expect Apple to report a 5% yoy EPS decline. I am including a 908 million share count (implying around $8 billion of buyback).

Product Unit Sales 

Macs: 4.4 million (10% yoy decline)

iPad: 12.4 million (12% yoy decline)

iPod: 3.7 million (30% yoy decline)

iPhone: 34.4 million (28% yoy growth)

Fundamentals:  The last 6 weeks for AAPL has been marked by product refreshes in iPhone and iPad that amount for more than two thirds of AAPL’s sales.  I think it is safe to say that despite the early demand for new iPhones (predominantly the higher end 5S) that the upgrades were met with a big yawn on the product front.  AAPL, a company once known for setting consumer electronics trends is for the time being left upgrading screens, battery life, processing power and adding new colors with evolutionary refreshes.

Much of the debate surrounding iPhone was that the company introduced the 5c that was meant to go after the lower end segment of the smartphone market, but the problem was that it was not priced accordingly.  By most media accounts the phone is not selling well, and there have been many rumors about fairly dramatic production cuts.  While this sounds bad, it may not be as the mix shift towards the 5S should increase gross margins, a metric that got trounced last year when AAPL introduced the lower end iPad Mini.  Regardless, AAPL put up a big first weekend number for iPhone, from AAPL’s Sept 23rd statement:

-Sold over nine million new iPhone 5s and iPhone 5c models, just three days after the launch of the new iPhones on September 20. 

-Expects total company revenue for the fourth fiscal quarter to be near the high end of the previously provided range of $34 billion to $37 billion, and expects gross margin to be near the high end of the previously provided range of 36% to 37%.

It should not come as a large surprise though that AAPL’s 2012 peak in its stock price also corresponded with its more than 10 year peak in gross margins.  The chart below of AAPL’s price over the last 5 years (brown), plotted against its trailing 12 month gross margins (green) shows the correlation.

AAPL 5 yr price vs Gross Margin from Bloomberg
AAPL 5 yr price vs Gross Margin from Bloomberg


Even though AAPL guided to the high end of their guidance for gross margins for Q4, the single most important trading metric for the stock after the print will likely be Q1 margin guidance.  To put some context on the importance of the metric, AAPL’s gross margins were 27.5% in 2003, which began to ramp at that time as iPods were the craze and Mac regained share, but saw a fairly dramatic bump to 35% in 2008 after the first full year of the first iPhone only to top out at 43.87% in 2012.  So the 6% point decline year over year (fy12 to fy13) is the largest in decades for the company and many bears suggest that was as good as it gets as the company will likely go down the path of all other hardware manufacturers before it, into commoditized hell.  AAPL recognizes this, which is likely why they have made some fairly large decisions to cede certain market share in smartphones and tablets to maintain what still amount to eye popping gross margins in the high 30s.

One last point on the fundamentals – growth investors will only see upward revisions if the company is able to once again introduce innovative products, in NEW categories like wearable or TV, and obviously continued geographic expansion (China Mobile).  Maintaining share and margins in a sort of status quo nature in markets where competitors can only compete on price is not gonna get it done.


OUR VIEW:  Given the Sept 23rd revenue and gross margin guidance, Q4 results likely leave little by way of suspense.  As usual, the stock’s reaction will be reliant on the company’s commentary/guidance for the all important Dec holiday quarter.  Recently the company said that they were going to give more “realistic” guidance as they recognized that the normal sandbagging conservative guidance was doing little good. SO the gazillion dollar questions will be: has supply loosened for the iPhone 5S to offset weakness in the 5C in the current qtr? Will consumers take the bait and pay $100 more for the iPad Mini with retina display as opposed to the iPad Mini from last year that the company lowered from $329 (16gb) to $299?  These 2 answers will dictate guidance and demonstrate whether or not AAPL will be able to show and earnings re-acceleration after the company’s first year over year earnings decline in a decade in fiscal 2013.

As I have said a few times over the last month, and in my Q3 earnings preview back in July, I would rather own AAPL here than 95% of the stocks in the S&P 500.  The company has an existing $60 billion share repurchase program in place, pays a dividend that yields 2.32%, 1/3 of their market cap in cash and an activist in Carl Icahn who thinks the company should use their cash to retire 30% or more of their outstanding shares.  It is our sense that Mr. Icahn has set a floor on the stock somewhere close to $450, at least for the time being, as his presence and insistence that he will push for more buybacks, and the existing buyback should be vol dampening on the downside.  If the stock were to decline due to one off fundamental blips or a broad market decline, it would also make sense that one way AAPL’s board could keep Icahn at bay would be to accelerate a good bit of the existing buyback.

The implied move: It’s our opinion that it’s more likely that the stock will come in line, or under-perform the expected move as opposed to a significant breakdown or gap higher equaling the 10% plus moves of late in fellow large cap tech brethren AMZN & GOOG.  One reason for this belief is that in this Q3 earnings season there have been very few year-to-date large tech laggards that saw buyers swoop in after their results as opposed to stocks like AMZN & GOOG that were already near all-time highs that to be fair saw just ok results, but investors stuck to what has been working as opposed to buying what hasn’t, like EMC & IBM.

The Trades: If you’re itching to play for a directional move, then calendars that take advantage of the elevated November vol using levels to the downside like 500 or 495 on the bearish side make sense, or back to the next real technical resistance level to the upside at the yearly high of about 555.

Using those same levels to sell the move, the Nov 490/525/560 call fly at ~$10 offers a decent risk reward profile for a high probability of at least a small win. Selling the 490/480 – 560/570 condor at just under $4 is an even higher probability for a win but obviously has a worse risk reward profile if things go wrong.

These were 2 trades that stood out to us, but were are likely more inclined to sell the weekly at the implied move and buy a longer dated option of the same strike if we play from a directional standpoint. Stay tuned as we will post some trade ideas tomorrow before the print.