Big Printin’ – $AAPL Tart

by Dan April 4, 2016 4:10 pm • Commentary

Shares of Apple (AAPL) are up 1.2% today, making news highs for 2016, placing the stock up 5.5% on the year, after a 20% rally off of its lows in late January.

The stock is now pushing up against the downtrend that connects its July high that preceded a 30% decline into late August, and its early November high that preceded its 25% decline into late January:

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

If the stock were to fail, this would likely be a decent spot to find a little resistance, right at the downtrend, which also happens to correspond with the stock’s 200 day moving average.

The next identifiable catalyst for AAPL shares will be their fiscal Q2 earnings confirmed for April 25th after the close.  The options market is implying about a $7 move in either direction between now and Friday April 29th close, or about 6%.  The average one day post earnings move has only been about 4.25% over the last 4 quarters, and the 10 year average has been about 4.8%.  Given the fact that earnings are three weeks away, the implied move seems fair to possibly cheap when you consider the stock’s recent rally and potential for failure.

There was one trade that caught my eye today when AAPL was trading $111.70, a trader bought to close 12,000 of the Jan17 80 puts for 1.62.

This trade likely closes a bullish bet made back on February 16th when AAPL was trading $96.57 and 16,000 of these puts were sold to open at $5.10.  If today’s trade was closing the trade from mid February, then the trader booked a profit of $4.2 million. Here is a chart of implied volatility in this strike since Oct.  You can see that the trader sold an option with IV in the mid 30s and bought back today in the low 30s:

From Bloomberg
From Bloomberg

In a post in early February I detailed a possible put sale (the October 80 puts to be exact) for those looking to possibly leg into the shares in the low 90’s:

For those who are not involved and like me looking for an opportunity to leg into a long position, selling out of the money puts is one way to do this.  For instance, if you were of the mindset that the stock should perform much better in the back half of the year after their expected release of the new iPhone 7, then with the stock at $93.50, selling the October 80 strike put at $4.70 is on way to do it. If the stock were $80 or higher on October expiration you would receive the $4.70 in premium, or about 5% of the stock price. If the stock were $80 or lower, or 14.5%, lower placing the stock’s peak to trough decline from its April highs at 40%, equal to that of 2012/13’s decline, then you would be put 100 shares of stock for every option sold, but your effective purchase price would be $75.30 (the put strike less the premium received) down about 19.5% from current levels, or about 45% from its all time highs in April.

If the stock stays solidly above 80 for some time, that put will decay over time.But the most you can receive is 4.75. So for those then looking to use that put to finance the purchase of calls you could use the put sale as the first leg of a risk reversal strategy, and buy an upside call like the Oct 100s. That tarde would be even or even a credit if the broader market took AAPL below $90.