Name That Trade(s) $AAPL: Chinese Delivery

by Dan December 5, 2013 3:07 pm • Commentary

This morning I had some thoughts ($AAPL and the Ol’ Wink Wink, Nod Nod) on last night’s fairly official report that “China Mobile has signed a long-awaited deal with Apple to offer iPhones on its network“.   This has been the announcement that most bulls on the stock have been waiting for, forget increased buybacks or something in the living room or the wrist, having the outlet to China Mobile’s nearly 800 million wireless subscribers is exactly what the doctor ordered for those who have be lulled to sleep by AAPL stock’s malaise.

With the stock up 10% in the last 10 trading days, gaining more than $50 billion in market cap, It is my sense that the news could be in the stock as it trades at its highest level in a year.  When the official-official announcement comes, analysts will be scrambling to raise their earnings estimates to incorporate millions of added units for a product that has gross margins 6-7% points higher than the company’s total.  Make no mistake this is a clear positive for earnings, and sentiment for the stock.

While sentiment measured by implied volatility is heightened, I would expect it to remain so as investors could be looking for the company to issue first weekend sales of iPhones on China Mobile (rumored to be Dec 18th launch) as they did after the Sept launch of iPhone 5s & 5c which was also coupled with revenue and margin guidance for the current quarter.

With all that in mind, we looked for a bullish strategy for the beginning of the New Year and into February Earnings that didn’t get its head over its skis too much, in case the recent ramp higher in the stock is near a consolidation or the rally will at least slow.

Calendars are a great way to play for that situation as you can slightly fade the recent run-up, while leaving yourself long deltas after the first expiration.

We also looked too take advantage of the year end holiday schedule which would benefit near term decay with the long portion of the calendar within the earnings month, which should keep that portion of the calendar bid (in implied volatility terms)

So here’s the Hypothetical trade:

TRADE: AAPL ($567) Buy Jan3rd / Feb 600 Call Calendar for 12.00

-Sell 1 Jan3rd 600 Call at 5.50

-Buy 1 Feb 600 Call for 17.50

Break-even on Jan 3rd Expiration:

The sweet spot for this trade on Jan expiration is 600, which means the Jan3rd call expires worthless and the February call stays bid. February IV is currently just below 30 and should see at least the mid 30’s into earnings, so that helps this structure out a lot, even if the stock moves away from the 600 strike slightly before Jan3rd.

Trade Rationale:

This trade will do very well if AAPL finds itself close to 600 around the end of 2013, and then sets up well into AAPL’s next earnings which is in February. Even if AAPL were to consolidate or pull back slightly from this level, the position shouldn’t lose much and then leaves us with options after Jan3rd expiration to spread the February call.


The other trade we like which doesn’t have a huge delta but provides for a big breakout range is an upside call fly, we are looking for a little bit of a buy the rumor sell the news situation, so we are waiting to pull the trigger, but here is the theoretical trade:

TRADE: AAPL ($567) Buy Apr 600/650/700 Call ButterFly for 6.00

-Buy 1 Apr 600 Call for 25.40

-Sell 2 Apr 650 Calls at 13 each or total of 26

-Bought 1 Apr 700 Call for 6.60

Break-Even on Apr Expiration:

Profits: Profits btwn 606 and 694 make up to $44. Max profit of $44 at $650.

Losses: Losses of up to 6.00 btwn 600 and 606 and btwn 694 and 700, max loss of 6 below 600 and above 700

Trade Rationale:

This trade only has a delta of about +5 here, so entry isn’t as important of a consideration. Even if the stock pulled back a little from this recent run the trade wouldn’t lose much value. The important part of this structure is being there for a break above 600 at some point in early 2014. February catches earnings and could be the next catalyst in the stock following the official China Mobile news. What this trade doesn’t do is have a huge payout immediately. Since it’s months away it will take a long time to realize it’s full potential, but a move above 600 in January or February would be enough to take it to a double. Anything above that would need for the stock to stay above 600 and approach 650 leading p to April. But we like the structure as a very cautious long in AAPL. It has lots of potential to profit, and very little risk to the downside in the form of delta or decay.

We like both structures but want to see how AAPL reacts after this China Mobile headline this morning. If the stock rolls over from today’s high it should pull back 10-20 dollars and we like to enter there. If not, we’d likely pull the trigger on the fly if stock stays strong. Stay tuned.