Name That Trade – If You Have $AAPL Gains, Read This

by Dan November 14, 2014 2:02 pm • Commentary

Let me get this out of the way first.  I am gonna take one for the team here and say something that no one else on this planet seems willing to say about your long Apple holding.  I am fully aware that the same thing could have been said at $100, $110 and maybe will again at $120, but I look at trade set ups on a mark to market basis, and this one is worth taking some Twitter heat on. So bear with me please…

In the last month, since the lows of the “correction of 2014” Apple (AAPL) shares have gained nearly 20% or about $130 billion in market cap.  Astounding!  Put another way, AAPL has gained the market cap of Home Depot (HD), a U.S. retailer with over $80 billion in sales!  The stock is up 42% year to date, equaling $280 billion in market cap, or equivalent of Alibaba!

As long as we are talking in astounding terms I think it is safe to say that it is hard to find an AAPL investor or Wall Street analyst who has a negative thing to say about the stock.  And why should they?  The long waited product cycle has begun.  They have new larger screen iPhones for the holiday season, the new year could be buoyed with Apple Watch, their first new product category in almost 5 years, plus the launch of PAY, possibly something with Beats on the music front, and whatever else they have in the pipeline.

When the stock topped out in Sept 2012, prior to its 45% peak to trough decline to its lows in 2013, few saw it coming as expectations seemed very achievable and the product pipeline was solid with the refresh of iPhone, iPad and Macs in the second half of that year.  I have no idea if we have a similar situation on our hands now but it is important to note that Wall Street analysts now expect earnings to grow an astounding 19% in fiscal 2015, and sales to grow a whopping 15% ($27 billion increase over fiscal 2014).  Expectations are anything but low.

Which is why the stock’s recent price action seems a tad overzealous.  I am not trying to rain on anyone’s parade, but If I were long AAPL (and I really wish I were), I would be just a tad worried about a some sort of mean reversion action early in the new year.

The stock has CRASHED UP:

AAPL ytd chart from Bloomberg
AAPL ytd chart from Bloomberg

Realistically, in the very near term a pull back on its own merits (excluding some sort of broad market melt down) looks like $100, 13% lower than current levels.

For those who think that trees grow to the sky, and don’t like paying taxes on massive gains late in the year, despite a slight inclination to ring the register, it makes sense to set a stop using what looks to be very reasonable options prices. The one year chart of 30 day at the money implied vol has once again approached the 52 week lows, prior to this week’s pop:

AAPL 1yr chart of 30 day at the money IV from Bloomberg
AAPL 1yr chart of 30 day at the money IV from Bloomberg

Options prices look fair to cheap, despite what should be some quiet trading during the holiday season, especially against a long holding in the stock.

So you think AAPL trades higher into year end, and you ain’t selling.  Consider putting a limit order with an expiration date that will lock in a good part of your gains:

TRADE: Against 100 Shares of AAPL long at $114*, Buy 1 Jan15 110 Put for 2.20

Break-Even on Jan15th Expiration:

-gains of stock above $116.20, current price plus put premium

-losses in stock between 114 and 107.80 (the put strike less the premium paid), protection below 107.80

Rationale: This trade gives 2 months protection, down about 6%. A level the stock was trading at 3 trading days ago!  I’M NOT HATING ON AAPL HERE. I’m merely pointing out the that the prudent protection available is awfully cheap!

*assumes prior long, pricing mark to market, not suggesting new long stock with long put, which is merely a symtheitc call.

Disclosure to Twitter!: Again, I’m not hating on AAPL. Despite having written extensively on the name, I have had only ONE bearish trade all year, which was on Sept 16th when the stock was $99.60, and closed a month later on Oct 16th when the stock was $97.20 (read here), and have stayed clear because it’s a bad short and I don’t usually buy into parabolic breakouts. But if you have gains in AAPL, this is a great trade into the New Year.