by Dan June 8, 2016 2:39 pm • Commentary• Trade Ideas

Event: Next week Apple (AAPL) will hold their annual World Wide Developers Conference with a keynote address likely given by CEO Tim Cook (not confirmed yet) at 1pm eastern on Monday June 13th.

With the stock at $99, the June 17th 99 straddle (the call premium + the put premium) is offered at about $2.15.  If you bought that, and thus the implied movement of AAPL between now and next Friday’s close, you would need a move above $101.15, or below $96.85, or about 2% in either direction to make money.  That seems pretty fair when you consider the stock was very near $101 on May 26th, and just below $97 on June 2nd, and up from $90 on May 13th:

AAPL 1 month chart from Bloomberg
AAPL 1 month chart from Bloomberg

Short dated options prices are making new 52 week lows, with 30 day at the money implied volatility about 18%, down from 40% in Jan/Feb and 55% in August:

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

So what I am getting at is that options traders are not expecting fireworks at next week’s event, on most weeks without such events the at the money straddle in AAPL usually implies somewhere around 1.5% movement over the next 7 trading days.  At the dawn of the iPhone age nearly a decade ago the company had from time to time used the forum to drop some new products and offerings on their developer faithful, but now with the lack of new innovative products they will likely just focus on improving existing operating systems and services (preview from the Verge.com here).

Regular reader’s know that I’m unexcited about AAPL’s near term prospects to turn around iPhone sales with this year expected to mark its first year over year decline. And most signs point to the company (for the first time since the 3 series) releasing the same form factor for a third straight iteration, essentially extending the existing product cycle. I would also add that AAPL’s release of the lower cost iPhone SE, basically a souped up iPhone 5, at a lower price point is probably their most important product, despite being its least innovative since the intro of the iPad 6 years ago.  Why you ask? Cause they are getting smoked by lower cost smartphones in emerging markets (Android  worldwide ASPs last quarter were $215 vs AAPL’s at $645).  Yeah, I know India has a population of 1.3 billion, and very low 3G and smartphone penetration (more on that here) but on AAPL’s last earnings call in late April, CEO Tim Cook said that the market in India:

“is where China was 7 to 10 years ago”

Here’s my thoughts on that from an April 27th post:

If that is the case it may take just a few more years for AAPL’s sales in India to move the needle on their current $200+ billion in sales in the current fiscal year. AAPL introduced the iPhone 3GS in China in 2009, and total sales in the region were less than 10% of their $36.5 billion total in fiscal 2009, but you can see the ramp over the next 5 years, with the March quarter’s contribution 24% of AAPL’s $50.5 billion total.

From the Verge, via A16z

It’s going to be hard for India to save the day any time soon, as demand for the iPhone SE continues to erode iPhone average selling prices (ASPs) that hit a high last quarter at $691, dropped to $645 in the March quarter and is still 3x that of average Android ASPs in Q1 of $215.

I won’t bore you with my fundamental take I can go on for hours, for those that care here.

So what do I think of the upcoming event? Not much, nor are investors expecting any surprises, which is fairly evident by generally benign near term options prices.  But I do expect AAPL’s fiscal Q3 report expected the last week of July to be fairly important as their forward guidance will include the impact of the lower priced SE on ASPs and expectations for the release of the iPhone 7 in late September.

To my eye, coupled with my less than sanguine fundamental view, despite cheap valuation and killer balance sheet, I think the stock’s decline is not done, and will have a re-test of $90 in the coming weeks prior to fQ3 earnings. The stock remains in a well defined downtrend, with $90 obvious support:

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

The trick is timing on the short entry, as there is clear potential for a gap fill from their Q2 earnings which would bring you back to $105, and far closer to the downtrend which would be an ideal short entry.

What Would Dan Do?

My eye is on the August 97.50 puts. With the stock at $99 those are offered at $3.50, with a break-even on August expiration at $94, down about 5%. Ideally I would like to look to finance them in some way shape or form, likely a calendar by selling a shorter dated put of the same or lower strike, but the potential volatility surrounding next week’s FOMC meeting kind of throws a monkey wrench into that thought process.

We will obviously keep a close eye on this one, and the best short entry may come after WWDC and the FOMC meeting if the stock were to attempt another gap fill, if that were the case we would likely look the $100 strike in August that will catch their next earnings event.

BUT if you thought investors will be disappointed with nothing new or exiting out of next week’s event and the Fed may offer some downward volatility for stock’s as the S&P 500 (SPX) approaches its prior all time highs, then the trade as an outright bearish view, or short term protection is:

AAPL ($99) Buy June 17th 99 put for $1.05

Break-even on Next Friday’s close:

Profits: below $97.95

Losses: up to 1.05 between 97.95 and 99, max loss of 1.05 above 99

Rationale: Options are cheap given the two events next week, and expectations while not high, are elevated in terms of the 10% rally of the 52 week lows in the last month.

We will wait a day or so and see if the stock can get back up above $100 as the SPX attempts to make a new high.