Name That Trade – Bobbing for $AAPL

by CC September 9, 2015 3:42 pm • Commentary

If you are like us, you just got done watching the two hour Apple (AAPL) iPhone, iPad, TV & Watch Keynote and were generally unimpressed with the new iThinigies. Sure, as a customer you’re modestly excited for incremental improvements to the products you already have but if you’re a shareholder or looking to be one soon, not so much.

To be fair, expectations were low heading into the event and the stock’s reaction, only down slightly from the start of the event, looks like no harm no foul so far.

But what to do now? iPhone pre-orders and first weekend sales are the next real identifiable catalyst and we should possibly see a press release Monday Sept 28th after the Friday Sept 25th release date.  And while not confirmed by the company yet, AAPL should report fiscal Q4 results the week of October 20th (likely Monday or Tuesday).

As Dan stated last night on CNBC’s Fast Money, it’s kind of hard to get too beared up on the stock after its 17% decline from its all time highs made in front of a seasonally strong period.  The company has a $635 billion market cap, $203 billion in cash ($150 billion net of debt) and is expected to have $230 billion in sales.  The stock will find buyers on its way back to $100.  And that’s the part I want to key on. If you think that Q4 results will be a positive catalyst for the stock, but given the stock’s recent volatility and given the continued uncertainty in global stock markets you are hesitant to buy stock here, or stay long, you might want to use the elevated implied volatility to replicate long exposure that defines a wide range where you would get long the stock down at technical support and participate in gains like stock up at the prior breakdown level.

Here is the trade we would consider as stock replacement for existing longs, or a stock alternative for those considering new long exposure:

Hypothetical Trade: AAPL ($111) Buy Oct 23rd weekly 100 / 120 Risk Reversal for even Money

-Sell to Open 1 Oct 23rd weekly 100 put at 2.25 (23 deltas)

-Buy to Open 1 Oct 23rd weekly 120 call for 2.25 (27 deltas)

Break-Even on Oct 23rd weekly Expiration:

Profits: above 120 (up 8%)

Loses: below 100 (down 9%)

Rationale:  The volatility the week of Aug 24th was downright scary for the largest market cap company in the world. This trade structure takes advantage of still elevated options prices (and downside skew) as you can sell a 9% out of the money put for the same price as an 8% out of the money call:

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

Taking a look at the one year chart the technical levels support the choice of strikes:

AAPL 1yr chart from Bloomberg
AAPL 1yr chart from Bloomberg

Regular readers know we are in the camp that stock goes back to $100 in the coming months and we will wait to take a shot on the long side at that point, or hopefully lower  🙂 But this trade is good risk reward with the stock at 111 vs. being long stock here with risk of a 10% decline or more possible.