This morning we previewed Apple’s (AAPL) earnings due after the bell today. Do read the whole thing, but for now, here were some closing thoughts:
So for now, I suspect that at current levels a Q1 iPhone unit miss is in the price just below $100, but it’s also my view that upside forward guidance will be very hard to come by given the state of emerging markets and the adverse affect of the U.S. dollar. If sentiment is poor enough that a sub 75 million iPhone unit price is in the stock, investors will need to be reassured that the introduction of the new lower priced, smaller size iPhone expected in March/April, that with a mix back towards iPhone 6s, from 6 plus does not cause (with dollar strength) a material hit to gross margins. If the company can guide inline, given the building headwinds in an increasingly saturated high end smartphone market, then the stock’s decline is likely halted, for now.
But if the stock does have a relief rally on merely inline guidance, then I think it gets sold, one quarter of past results and forward guidance that are not as bad as expected is not gonna make this aircraft carrier turn on a dime. I expect the stock to trade with an 8 handle at some point in the coming weeks/months, and any bounce to $110/$115 should be sold.
On Friday we laid out a defensive collar for long holders (read here) and we would probably buy a put spread instead of a straight put against long stock in this structure to get closer to the money protection. I described the strategy on Friday’s Options Action, but we will be sure to offer some directional trade ideas before the close:
As we mentioned, we detailed a collar strategy on Friday for those that are long and a little worried in this volatile market. The stock is basically unchanged from when we wrote that and the collar is a good strategy for those looking for disaster protection with a simple 2 strike option hedge.
But what about other strategies into the print? Let’s look at some starting with a stock alternative/replacement for those that want to stay long but define their risk in case the bottom drops out on the report:
In both trade ideas we chose to use Butterflies (read our discussion here) given the high levels of short dated options prices.
Stock Alternative/ Replacement:
In lieu of 100 shares of AAPL ($100) Buy the Feb 100/110/120 call fly for $2.50
- Buy to open 1 Feb 100 call for 4.05
- Sell to open 2 Feb 110 calls at .85 each (1.70 total)
- Buy to open 1 Feb 120 call for .15
Break-Even on Feb Expiration:
Profits: between $102.50 and $117.50 of up to $7.50, max gain of $7.50 at $110, up 10% from current levels.
Losses: up to $2.50 between $100 and $102.50 & between $117.50 and $120, with max loss of $2.50 below $100 or above $120.
And for those traders out there interested in the event, here’s one we think makes sense to play for a break down to recent lows:
Outright Bearish:
In lieu of 100 shares short of AAPL ($100) Buy Jan weekly 100/93 / 86 Put Butterfly for $1.85
- Buy to open 1 Jan weekly 100 put for 3.04
- Sell to open 2 Jan weekly 93 puts at .63 each (1.26 total)
- Buy to open 1 Jan weekly 86 put for .07
Break-Even on Feb Expiration:
Profits: between $98.15 and $87.85 of up $5.15, max gain of $5.15 at $93, in line with the implied move to the downside.
Losses: up to $1.85 between $100 and $98.15 & between $86 and $87.85, with max loss of $1.85 above $100 or below $86