Going into earnings we placed a trade on AAPL (below) that looked to finance a mildly bullish bet over the next few months by selling the earnings week options, basically betting on a small move on earnings either up or down which would set-up to own upside calls for what we saw as potential positive catalysts in the weeks to come heading into the company’s annual shareholder meeting on Feb 28th. With the big move down on disappointing iPhone sales and fairly horrid guidance, we think it makes sense to adjust this trade to give us greater odds of success. To recap, here was the initial structure:
TRADE: AAPL ($550) Bought Jan 31st (next week expiration) / March 575 Call calendar for 8.00
-Sold 1 Jan 31st 575 call at 5.30
-Bought 1 March 575 call for 13.30
Here’s what we said as far as our rationale:
Rationale:
If the stock doesn’t have much of a move on earnings this structure sets up well for the nearly two months following. We think AAPL is likely to make some news in that time period , and we want to be there for that, but we don’t want to risk a ton of premium in the meantime as the stock has an earnings to get through, not to mention weakness in the overall market.
With the stock close to $508 this structure took it on the chin as the $575 calls are now very far out-of-the-money. Those are currently trading around $2.10 with the weeklies we’re short worthless. Looking at the position we wanted to discuss how to try to get some of that money back without risking too much new premium. Basically, we want to lower our expectations of the stock rallying from here, so that we don’t watch the last 2.10 decay to nothing. An interesting adjustment can be made to the position to lower the break-even and it involves turning the March 575 call into the upper wing of a butterfly. So here’s the adjustment:
ACTION- Buy to open the AAPL ($508) March 525/550 1×2 call spread for $1.00
-Buy 1 March 525 call for 10.10
-Sell 2 March 550 calls at 4.55 each, or 9.10 total
New position is the March 525/550/575 call fly for $9.00 (currently $3.10)
New Break-Evens on March Expiration:
Profits: gains btwn 534 and 566 of up to 14, with max gain of 14 at $550
Losses: btwn 525 and 534 lose up to 9, btwn 566 and 575 lose up to 9 with max loss of 9 below 535 and above 575
Rationale: With the stock down 7.5%, owing the March 575 call seems like a lotto. Now with the stock approaching key support, I suspect it finds a home between $500 and $525 for the time being, with $550 serving as very staunch resistance without some fairly significant news. This trade adjustment gives us the best shot of recouping any premium on a move back towards key resistance at the 50 day moving average in the next couple months.
[hr]
Original Trade From Jan 24th, 2013: New Trade – $AAPL: iCahn
AAPL reports their fiscal Q1 results Monday after the close. The options market is implying about a 5% one day move which is a tad shy of the avg over the last 4 qtrs of about 5.25%. With the stock around $550, the Jan 31st 550 straddle (the 550 call + the 550 put) is offered at about $29.50, if you bought that today you would need at least a $29.50 move by next Friday’s expiration to make money, or about 5%.
It is our sense that Carl Icahn did not buy $1 billion worth of stock in the last couple weeks (read here) in front of a miss and guide down. While his long thesis has little to do with near term financial results, he now owns $3.6 billion worth of stock and has a very clear agenda, MASSIVE SHARE REPURCHASE. As an average investor this is a hard thesis to hold out for as Mr. Icahn has clearly stated he has allotted a some time for this to play out, but strongly believes in the company’s positioning and product portfolio.
We don’t see Monday’s Q1 report as a massive mover for the stock, and frankly we could see it up or down a few %. What we do view as the determining factor for the shares in the next few months is any change of opinion by AAPL’s management and board on share buybacks as they get closer to the scheduled Feb 28th shareholder meeting.
But also, what of new products?? In a memo to employees back in December CEO Tim Cook suggested “We have a lot to look forward to in 2014, including some big plans that we think customers are going to love”. Its about time. Aside from product refreshes, the last major new category introduced was the iPad back in April 2010… almost 4 years ago. For the stock to attempt to sniff $600 again anytime soon, it is not going to be increased buybacks & dividends, it is going to be the introduction of a new exciting product, the sort that captivated consumers and investors alike during the last 5 years of Steve Jobs’ reign as CEO. The rumors are out there, wearable tech, smart home, smart car. You get the picture.
With all of that in mind, I want to set up to own slightly longer dated calls, but finance the purchase by selling higher vol near dated calls:
TRADE: AAPL ($550) Bought Jan 31st (next week expiration) / March 575 Call calendar for 8.00
-Sold 1 Jan 31st 575 call at 5.30
-Bought 1 March 575 call for 13.30
Break-Even on Jan 31st Expiration:
The sweet spot for this trade is $575, but anything within range of that strike will do well and set-up for the possibility of a rally into the Feb 28th shareholders’ meeting.
Rationale:
If the stock doesn’t have much of a move on earnings this structure sets up well for the nearly two months following. We think AAPL is likely to make some news in that time period , and we want to be there for that, but we don’t want to risk a ton of premium in the meantime as the stock has an earnings to get through, not to mention weakness in the overall market.