Name Those Trades: Get Your Good ‘Til Cancel Bids In $AAPL, $DIS

by CC August 21, 2015 12:30 pm • Commentary

The volatility in almost every publicly traded asset class the world over has finally come home to roost in the long untouchable U.S. stock market.  The VIX has exploded from the 2015 lows earlier this month, to new highs on the year today, besting a similar move back in December that now is greater than 120% in a matter of weeks:

VIX 1yr chart from Bloomberg
VIX 1yr chart from Bloomberg

Unless there is some sort of unexpected adverse knock on effect of the price action, the smart money would be on some sort of pause or bounce to this downward pressure in U.S. stocks fairly soon. That should have investors that have been programmed to buy the dip over the last few years look to high quality stocks that have fairly, or unfairly been trounced of late.  Regular readers know that we hate sentiment bubbles, but we like when they burst, resulting in hate selling that could provide opportunities as the disconnect between sentiment and fundamentals provides the very opportunity we wait for.

Good examples could be in Apple (AAPL) and Disney (DIS) since their earnings. While their recent results highlighted the risks to the much loved stories, there are levels from both a valuation & sentiment standpoint, where long entries could make sense very soon.

AAPL for instance is down nearly 20% from its all time highs made in late April, now down 1.5% on the year, and with little technical support in sight for another 5%.  I’ll place my good till cancel buy order at $100.01.  At that point the Sept 9th iPhone and TV event will be very well discounted:

AAPL 2yr chart from Bloomberg
AAPL 2yr chart from Bloomberg

And DIS, WTF? This stock was unstoppable, ESPN, Star Wars, Avengers, Parks, blah blah blah, all fine in good until they suddenly weren’t. Not much has changed aside from Netflix, are you kidding me? The unwind in the positive DIS sentiment suddenly seems endless. Except the stock did reverse its early losses today, and may find support at $100.  But if it doesn’t, $90.01 is my good till cancel bid, maybe that turns into $95.01 in the coming days. ¯\_(ツ)_/¯

DIS 2yr chart from Bloomberg
DIS 2yr chart from Bloomberg

I am not trying to be cute, but if this one is “for the kids” meaning a buy and long term hold, then be patient. If you are ADD like me, and you need some skin in the game, then maybe start to sell some puts, they are for all intents and purposes good till cancel buy orders, and the massive spike in volatility in both names is presenting great opportunities to sell puts for those who are willing to be put (and own) the stocks lower:

AAPL 1yr chart of 30 day at the money implied volatility:

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

DIS 1yr chart of 30 day at the money implied volatility:

DIS 1yr chart of 30 day at the money implied volatility:
DIS 1yr chart of 30 day at the money implied volatility:

So what’s the options trade?

AAPL at $108.90, sell to open Oct 100 put at $2.80, stock above $100 you receive $2.80, stock below $100 and you are put stock at $100 on Oct expiration, but less the $2.80 in premium, or $97.20.  Not a bad way to put in a good till cancel limit buy order, paid to do so.

And in DIS at $99.95, sell to open Oct $90 put at $1.50, stock above $90 you receive $1.50, stock below $90 and you are put the stock at $90 on Oct expiration, but less the $1.50 in premium, or $88.50.   Again, not a bad way to put in a good till cancel limit buy order, paid to do so.

We’re not doing any trades today but one more significant flush below 2000 in the SPX and we might get in there closer to our levels with puts sales and possible risk reversals to play for a bounce higher.