In case you missed it, Apple (AAPL) traded below $90 for the first time today since June 2014. I would add that since the stock last traded below $90, the company has bought over $60 billion worth of stock as part of their capital return plan at higher levels:
Options volumes were about 1.5x average daily volume with calls outnumbering puts nearly 1.5 to 1. Much of the call activity look like traders closing prior bullish bets with the usual banging around in near the money weekly options. When the stock was $89.81 near the lows of the session a trader sold to close 10,000 of the July 100 / 110 call spreads at 58 cents.
With the stock breaking below one year support, the question on everyone’s mind is where do buyers come back in? A look at the long term chart from the 2008 financial crisis lows should the potential for a re-test of the uptrend, and possibly a gap fill back towards $80:
It’s long been my view that there has been a sentiment disconnect in AAPL. Financial and Tech journalists, coupled with sell side analysts have yet to capitulate on the stock as it has spent the last year in a systematic 30% decline, shedding more than $150 billion in market cap while large hedge funds and mutual funds (who have been cognizant of the challenges of the maturing smartphone market) have bee selling.
Are we there yet? What’s the trade?
If you were inclined to purchase shares, back near the $80 level, which would mark a 40% peak to decline from its all time highs back in May 2015, and you believe the stock will find a bottom between now and the September release of the iPhone 7, you might consider a bullish risk reversal in October expiration.
For instance with the stock at $90.65, you could sell the Oct 80 put at $2.50 and buy the Oct 100 call for $2.75, resulting in a net debit of 25 cents. If the stock is between $80 and $100 on October expiration, then you would lose the 25 cents in premium spent for the trade. If the stock is below $80 you would be put 100 shares per 1 contract sold and suffer losses. If the stock is above $100.25 you have gains of the stock. What’s nice about this trade structure is that it offers a wide range where there is a minimal loss on October expiration, while offering some wiggle room to the downside in the event the stock sees lower lows. But what is attractive about the trade is the potential leverage to the upside in the event the stock catches some momentum into the much anticipated product launch in the fall.
As it stands now that risk reversal is about 50 deltas. As time goes by those deltas will change depending on where the stock is. Above 100 and below 80 near October expiration will mean it’s close to 100 deltas (like being long AAPL above 100 and below 80 but not in between). So it’s like an order to own AAPL stock only if it breaks out back above 100 or if it dips below 80, which acts like a good til cancel order below. Any movement inside 80 and 100 and it’s like a nothing done. Obviously before then it has mark to market losses and gains. But this is a trade for those that would like to buy AAPL in the hopes that it will quickly get back above 100 but don’t want to take the risk of buying it near 90 in case it goes to 80.