Name That Trade(s) – $AAPL Sauce

by Dan January 27, 2014 12:30 pm • Commentary

Earlier today we offered our fiscal Q1 Earnings Preview for AAPL (below), and on Friday introduced the earnings trade that we felt most convicted on (here).

Aside from the call calendar, we wanted to offer some options overlays that long holders of the stock could consider depending on their own view into tonight’s print.  As regular readers know, we spend most of our time trying to identify alternatives through the use of options for directional investors, but in widely held stocks like AAPL, we like the idea of adding options overlays to long stock to add yield, leverage or for risk management purposes.  Below are a few trades that we have identified that could accomplish each:

Leverage & Yield Enhancement:

Trade Against 100 Shares of long AAPL at $550:  Buy Feb 575/600 1×2 call spread for 1.50

-Buy 1 Feb 575 call for 9.30

-Sell 2 Feb 600 calls at 3.90 each or 7.80 total

Break-Even on Feb Expiration:

Profits: gains of the stock btwn 550 and 600, added 23.50 of profit potential between 551.50 and 600, max gain of 50 from the long stock position and 23.50 from call spread overlay, but long stock called away, with added 4.25% yield.

Losses: below 575 lose the 1.50 Premium outlay and losses of the stock below 550

Rationale:  This trade structure is a very cheap way to add incremental leverage on the upside if AAPL is between 576.50 and 623.50 on Feb expiry.  The main risk is not the 1.50 premium loss, which is a very small price to pay for this nice upside range.  Rather, it’s the risk of giving up further upside in AAPL stock above 625, in which case you would not participate.  However, if your view is that that is a very low likelihood event, or you are satisfied selling the stock above that level, then this trade structure makes a lot of sense.


Selling the Implied Move:

Trade – Not against stock, AAPL ($550) Buy the Feb 500/550/600 Call Butterfly for 20.00

-Buy 1 Feb 500 call for 54.00

-Sell 2 Feb 550 calls at 19.00 each or 38.00 total

-Buy 1 Feb 600 call for 4.00

Break-Even on Feb expiration:

Profits: Max gain of $30 at $550 in the stock. Gains between $520 and $580

Losses: below $520 and above $580 with max loss of $20 below $500 or above $600

Rationale: This structure offers a decent risk reward for AAPL to not make any serious move higher or lower from where it is currently trading.  It should be noted that this trade could also be put on for those with no position in the stock, as a purely speculative position, though the trade is only profitable if AAPL ends on February expiry between 520 and 580.  This is a structure that you would only put on if you thought AAPL would remain rangebound for the next month.  The structure gains most of its value near expiry, so it is also only a trade for those willing to wait for a bit for the structure to decay.




Trade Against 100 Shares of long AAPL at $550:  Sell Mar 590 call to Buy Feb 520/480 Put Spread for Even $

-Sell 1 March 590 Call at 9.35

-Buy 1 March 520 Put for 13.35

-Sell 1 March 480 Put at 4.00

Break-Even on March Expiration:

Profits: gains of the stock of up to 40 btwn 550 and 590, stock called away at 590

Losses: btwn 550 and 520 have losses of the stock, protection btwn 520 and 480, no protection below.

Rationale: This is a great structure to protect against a break below the 520 support level in case AAPL’s report disappoints.  In order to get that protection between 520 and 480, you would have to be willing to give up the upside on the stock above 590.  So this trade structure makes sense if you want to hold on to AAPL stock for a further 8-10% upside, but don’t expect much in the way of gains above there, and want protection in case you’re wrong and the stock moves 10-15% lower over the next couple months.  




Original Post Jan 27th, 2013:  $AAPL Fiscal Q1 Earnings Preview

Event: AAPL will report their fiscal Q1 earnings tonight after the close.  The options market is implying about a 5.5%* one day move,  slightly higher than the 4 & 8 qtr avg of ~5% .

*The Jan 31st 550 Straddle with stock around $552 (the call + the put) is offered at about $31.50.  If you bought this, you would need a $31.50 move in either direction by Friday Jan 3st at 4pm to break-even. With earnings coming tonight 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 45 Buys, 14 Holds and 4 Sells with an avg 12 month price target of ~$602 (this has moved up from $552, or about 9% since prior to their Q4 results in Oct).

Short interest sits at about 1.5% of the float, down from the 2% level 3 months ago, and at its lowest level since the fall of 2012.  Its highest level in the past year was in the spring of 2013, around 4.5% of float.

Options Open Interest:  Open interest in AAPL has historically been skewed to calls, and the current situation is no different.  There are around 1.25m calls outstanding vs. about 750k puts.  The 1 month average volume has also favored calls vs. puts by a ratio of about 1.65 to 1.  Among weekly options, the Jan31st 560 and 570 calls are the only strikes with over 10k of open interest.  The Feb22nd 600 calls and the Apr 600 calls are the only near-term strikes with over 20k of open interest.  In Jan15, the 500 calls have over 30k of open interest.

Implied Vol Snapshot:    Implied volatility in AAPL is in the low-30’s, which is actually on the low end of where it has normally been prior to an earnings event over the past 2 years (has been as low as 30 and as high as 45):

[caption id="attachment_35365" align="alignnone" width="600"]30 day implied volatility in AAPL, Courtesy of LiveVolPro 30 day implied volatility in AAPL, Courtesy of LiveVolPro[/caption]

A big reason for the lower-than-normal level of implied volatility is that AAPL realized volatility has been quite low over the past 3 months, and the stock is smack dab in the middle of its 2 year range (of 385 to 705).  Moreover, Icahn’s involvement and AAPL’s potential use of its cash bundle possibly puts a floor in the stock on the downside, which has also lowered implied volatility.

Price Action / Technicals:   Our friend and illustrious technician Carter Worth of Oppenheimer highlighted the steady uptrend in AAPL shares since the June 28th low of around $389, which was a double bottom in retrospect (video here).  That trend line is crucial support for the stock, which likely makes a move to the $500-$510 support area on a clean break after earnings:

[caption id="attachment_35369" align="alignnone" width="600"]AAPL daily chart, Courtesy of Bloomberg AAPL daily chart, Courtesy of Bloomberg[/caption]

On the upside, the high of the past year is the December high of around $575.  More important resistance lies around the psychologically important $600 level, which has not been touched since the fall of 2012, shortly after AAPL stock topped out.

The expected range for AAPL stock on the earnings event, based on current options pricing, is in the $520-$580 range, which matches the short-term support and resistance areas quite well.

Q1 & Q2 Expectations: 

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

[caption id="attachment_35355" align="aligncenter" width="589"]Q1 Estimates From Fortune Q1 Estimates From Fortune[/caption]

Estimates/Guidance From Bloomberg:

  • 1Q EPS est. $14.07 (range $13.49-$15); avg. est. up 0.2% over past four weeks
  • 1Q rev. est. $57.48b (range $55.93-$59.88b); avg. est. up 0.3% over past four weeks
  • APPL forecast 1Q rev. $55b-$58b (Oct. 28)
  • 1Q gross margin est. 37.3% (range 36.9%-37.9%)
  • AAPL forecast 1Q gross margin 36.5%-37.5%
  • 2Q EPS est. $10.93 (range $9.93-$12.54); avg. est. up 0.6% over past four weeks
  • 2Q rev. est. $46.10b (range $43.15b-$49.68); avg. est. up 0.6% over past four weeks
  • 2Q gross margin est. 37.3% (range 36%-39%)

Unit Breakdown:

  • 1Q iPhone unit est. 55m
  • iPhone ASP $607
  • 1Q iPad unit est. 25m
  • iPad ASP $447
  • 1Q Mac unit est. 4.5m
  • 1Q iPod unit est. 7.9m


Q1 was a bit of a whirlwind quarter for AAPL dominated by the dual release of 2 different (but pretty much the same) iPhones at the same time.  Much of the debate in the investment community prior to release of the “low end ” iPhone 5c was what the impact of a higher mixed of lower margin phones would be on the financial model.  Analysts only had to go back a year with the intro of the iPad Mini in fiscal 2013 Q1, which saw a down-tick in gross margins of 150 bps due to greater sales of the new device vs the high margin larger iPad.  Aside from the debate around high-end /low-end phones, much of the worry was absorbed by the announcement that China Mobile would start selling both iPhones in January, and going forward the increase unit sales could help offset lower profitability.

Despite the stock’s lack of performance in the past year (basically sitting at the exact same spot this time last year), expectations on the product front have come down quite dramatically as the company has not introduced a new product category since the iPad back in April 2010.  We think this is a good thing as investors get their arms around what should be a high single digit earnings grower as opposed to the 30, 40, 50% growth they had become accustomed to as the company was creating new product categories off of a much smaller revenue base.

OUR VIEW:   It is our view that the stock in the low to mid $500s should find a good bit of support as a result of their product portfolio, buyback, balance sheet, activist involvement, increased geographic roll out and the likelihood of new products in 2014.  It is also our view that it would take a fairly dramatic beat and raise to see the stock attempt to breach $600 in the very near term without a combination of estimate revisions, increased buyback and dividend and the intro of a new product category.  We do not expect any commentary on the call tonight about new products or increase capital return, and therefore the focus will be the mix shift of iPhone both here and abroad, the impact on corporate margins and the roll out with China Mobile.

If the China Mobile launch got off to a sluggish start, then fiscal Q2 guidance could be challenged.  If that is the case, we could see the stock trading down in line with the implied move of about 5% to $525/520, the level at which it consolidated back in October/November.  If the company beats slightly and guides up do to a better launch and the guidance speaks to a better mix of higher margin iPhones and iPads, then the stock could likely test the previous highs from December at around $575, also in line with the implied move.

The main take-away though is that the stock appears to have found a bit of an equilibrium as far as expectations, and the next couple of catalysts after earnings will be the Feb 28th shareholder meeting and any sniff of new products.

On Friday we bought a Jan 31st /March 575 call calendar (here) playing for the later scenario.  Stay tuned as we will post more thoughts in a Name That Trade post offering alternative trade ideas for those with differing views from our own.