Regular readers know that we are very happy long time consumers of almost every Apple (AAPL) product, both personally and professionally. We spend a good bit of time writing about AAPL the stock as it is a very unique phenomenon in the investment community and we have found it challenging intellectually to attempt to pick the bull case apart, which was until very recent universal positive. It’s been our view since late Spring that the stock was likely dead money, meaning that the stock was incorporating a lot of good news and positive sentiment and in the best case scenario was likely to go sideways (read here from June 23rd), but also ran the risk of a correction if the company did not deliver on new innovative products (despite their increasing dominance with the iPhone).
The stock has in fact gone sideways for months. Trust me this is not a victory lap, we don’t own the stock. We haven’t even traded the stock or the options in a very long time, but we know a lot of you do and we like to add our two cents when we think we can help holders use options to potentially add yield, leverage or for protection.
We think now could be a great time to use elevated options prices to add yield to existing holdings in front of the release of initial iPhone 6s sales and their hotly anticipated fiscal Q4 results (that should come in the week of Oct 20th.)
Taking a quick look at the chart of AAPL since the start of 2014, one can see that the uptrend that has been in place was broken in late July and August, and the stock looks to have some near term overhead resistance at $120, and then massive long term overhead resistance at $130. On the downside, $110 should serve as near term technical support with large long term support at $100:
But that Flash Crash should have put the fear of god into shareholders. And now with the uncertainty around iPhone sales and fiscal Q1 guidance can exceed high expectations, this bounce in the stock presents a decent opportunity for investors to add some protection to their long holding. Post earnings we could see short dated options prices coming down from current IV levels (near 33%) to the mid to low 20s assuming a fairly normal vol environment:
Therefore you want to finance any protection with the sale of another strike. So if I were long AAPL at $115, and willing to sell my stock in two months up 15%, but want disaster protection I would do this option overlay on my long:
Hypothetical Trade against 100 shares of AAPL at $115:
Buy the AAPL ($115) Dec 130/100 collar for $1
-Sell to open 1 Dec 130 call at 1.50
-Buy to open 1 Dec 100 put for 2.50
Break-Even on Nov Expiration:
Profits: gains of stock between $115 and $130, where you are called away (effective price of $129 up 10%).
Losses: of the stock below $115 but capped below 100 (effective price of $99). A loss of $1 between 100 and 130.
Rationale: This trade adds protection below long term support during times of uncertainty in the market. This is only for those willing to sell the stock near previous highs.