Name That Trade – $AAPL Picking

by Enis July 22, 2014 2:31 pm • Commentary

We previewed AAPL’s earnings report this morning.  AAPL is the largest market cap company in the world, and the most closely watched earnings event each quarter as a result.

Aside from the earnings result itself, investors will be listening closely for guidance to assess management’s view of the crucial product launches in the second half of the year.  Given the anticipation and excitement around those product launches we expect any bad news to be met with stock buyers at lower prices. However, we view a breakout to new highs immediately following the results as unlikely given the 18% rally year-to-date and the increased expectations/valuation of the stock.

With that overall view in mind, we wanted to put out our favorite structures in each direction for those that have an opinion into the print.  

For those looking to play for disappointment and a move back towards the 50 day moving average around $91.25, we would favor a defined risk bearish bet that looks for the stock to decline in line to the implied move:

Hypothetical Bearish Trade: AAPL ($94.40) buy to open Aug16th 95/90/85 put butterfly for $1.35

-Buy 1 Aug16th 95 put for 3.50

-Sell 2 Aug16th 90 puts at 1.25 each or 2.50 total

-Buy 1 Aug16th 85 put for .35

Break-Even on Aug16th Expiration:

Profits: btwn 86.35 and 93.65, of up to 3.65, with max gain of 3.65 at 90

Losses: up to 1.35 btwn 85 and 86.35 and btwn 93.65 and 95, with max loss of 1.35 below 85 and above 95



Or, for those who think AAPL goes higher from here, but don’t expect a breakout to a new all-time high, the $100 level is the obvious resistance level to target.  That level is also close to the implied move of 4.75% for the stock to the upside.  A call calendar that allows for owning September calls, which should capture the new iPhone 6 release date, makes sense:

Hypothetical Bullish Trade: AAPL ($94.35) buy to open 1 Aug16th / Sept 100 call calendar for 0.84

– sell to open 1 Aug16th 100 call at 0.87

– buy to open 1 Sept 100 call for 1.61

Break-Even on Aug16th Expiration:  Max gain if AAPL is at $100 on Aug16th expiration.  The trade is likely profitable on Aug16th expiration as long as AAPL is within a few percent of the $100 strike.


And finally, for those who simply want a short volatility bet on AAPL rather than a directional trade, this structure looks reasonable:

Hypothetical Short Vol trade: AAPL ($94.40) buy to open Jul25th 90/95/100 call butterfly for $1.50

-Buy 1 Jul25th 90 call for 4.93

-Sell 2 Jul25th 95 calls at 1.91 each or 3.82 total

-Buy 1 Aug16th 100 call for .39

Break-Even on Jul25th Expiration:

Profits: btwn 91.50 and 98.50, of up to 3.50, with max gain of 3.50 at 95

Losses: up to 1.50 btwn 90 and 91.50 and btwn 98.50 and 100, with max loss of 1.50 below 90 and above 100

This trade is essentially an iron condor, presented as a fly to make the break-even calculation simple.  The trade does well as long as AAPL remains around $95 by Friday’s expiration. It’s risk is a move to or past 90 or 100.