Event: Apple (AAPL) will report their fiscal Q3 earnings today after the close. The options market is implying about a 3.5% one day move following results, as the Aug 4th 149 weekly straddle (the call premium + the put premium vs stock $149) is offered at $5.50, or ~3.7% of the stock price. That is the implied movement between now and this Friday’s close, most of that move is being priced for the earnings event. If you thought options were priced too cheap, and thought the stock was going to move one way or the other, but unsure which and bought the straddle (and thus the implied move) you would need a rally above $154.50, or a decline below $143.50 to make money.
Price Action / Technicals: AAPL is up nearly 28.5% year to date, gaining a little more than $200 billion in market capitalization, basically the value of Chevron (CVX) (a company expected to have $145 billion in revenues this year) Here’s another perspective on Apple’s rally, less than 25 companies in the S&P 500 have market caps greater than $200 billion Apple has gained year to date. Interestingly, AAPL is at nearly the exact same spot it was when they reported their fq2 results on May 2nd. AAPL’s implied move and the stock’s initial reaction are worth discussing though. The options market was also implying about a 3.5% one-day post earnings move. The stock massively underperformed the implied move initially, but then exploded higher a few days later:
The point here is that the implied move is merely a guide that traders can use to gauge sentiment. It is the equilibrium point in the options market for those buying for a move, and where the sellers are willing to.
Taking a quick gander at the one year chart, and connecting some dots and drawing some lines, the stock might have hit some resistance at the uptrend from the post election lows in November, but with decent support in the low $140s. Below $140 though there appears to be a bit of an air-pocket to the February earnings gap near $130:
Expectations… all eyes are on the company’s impending launch of their 10th anniversary iPhone due out this fall. There has been no shortage of rumors of a delay of the new device that could cost more than $1000. While some have scoffed at the intro at phone at that price point, Chris Mims from the WSJ over the weekend made a few good points, why this device coupled with a refreshed iPhone 7 line for the masses is a good idea for Apple’s brand. Delays of the high-end device and a merely evolutionary iPhone 8 might temper the pace of the so-called upgrade supercycle that so many analysts are expecting. This is important because, despite AAPL’s 28% year to date gains and $256 billion cash hoard ($158 billion net of debt), there remains some investor trepidation that the company which is coming off its first annual decline in eps and sales last year (down 10 and 8% respectively) might have hit peak performance as its core market matures and they find emerging market opportunities very different than North America and Europe. Bulls will point to a rebound in China, but China sales have declined for four straight quarters (down 14% in fQ2, down 12% in fQ1, down 30% in fQ4’16 and down 33% in fQ3’16.
Bulls will also point to the double digit growth in Services revenue that has been between $6 billion and $7 billion over the last four quarters, making up between 9% and 15% of their total revenue. IN fQ4’16 Services grew 24% yoy, but that rate has declined in the last two-quarters to just 18%. AAPL is getting their lunch eaten in the streaming music space by Spotify which just announced they have 60 million paid streaming subs with Apple at probably half that despite an installed base of 1 billion iOS devices. They have no streaming video service, of which Netflix has 104 million paying subs, while Apple still sells and rents movies one at a time. But Apple is no longer competing globally with just hardware manufacturers, The WSJ highlighted the threat of the stickiness of chat apps in countries like China:iPhone’s Toughest Rival in China Is WeChat, a Messaging App:
Once the No. 3 player in China, Apple’s iPhone is now the No. 4 smartphone brand by market share behind local rivals Oppo and Vivo, from BBK Electronics Corp., and Huawei Technologies Co., according to JL Warren Capital, a market-research firm focused on China. The iPhone’s market share has fallen below 10% in China, from a peak of 13% in 2015.
Because of WeChat, in part, 50% of iPhone owners stayed with Apple when buying a new phone, according to independent analyst Ben Thompson of Stratechery, who highlighted the WeChat threat in a recent note. The figure is 80% for the rest of the world. That has turned Apple into just another vendor in China, Mr. Thompson wrote recently—“a hazardous place to be.”
Service growth in countries like China might be a challenge given regulations on what can be sold in the app store, highlighted by this past week’s removal of virtual private networks (VPNs) from the app store at the government’s request. While this is not particularly unique for tech and media companies in China, it does call into question Apple’s ecoystem strategy around the iPhone and how service rivals like WeChat and many others may pose a very different threat than what the company faces in the west.
From where I sit, the quarter to be reported, and the guide for the current quarter are not particularly important as investors will be focused on commentary for fiscal Q1, the holiday quarter that will have the bulk of new iPhone sales. The only problem, investors will not get any color on that on this call. The lack of information and clarity on Q4 and Q1 could cause investors to hit the pause button.
So what’s the trade?
On Friday when the stock was a tad higher, we detailed a zero cost collar for long holders looking to hold onto their stock, but willing to give up some potential upside for downside protection out to October expiration (read here):
Hedge Idea: vs 100 shares of AAPL ($150) Buy the Oct 160/140 collar for even money
vs 100 shares of AAPL ($150) Buy the Oct 160/140 collar for even money
- Sell 1 Oct 160 call at 2.95
- Buy 1 Oct 140 put for 2.95
Breakeven on Oct expiration:
Profits of up to $10 between 150 and 160 on the stock (max gain of 6.6%), called away above 160.
Losses in the stock down to 140 but protected below.
Rationale – The expected move for next week’s earnings is about $6 in either direction (or about 4%), out in October it’s about $13. This collar protects against a surprise move lower on earnings and gives enough room to the upside in case the stock moves significantly higher near term that the hedge could be adjusted for small losses vs gains in the stock.
But what about those looking to go long the stock, or replace existing stock with defined risk?
Bullish/ Stock alt
Buy the Aug4th 155 Sept 150 diagonal call calendar for 3.50
- Sell 1 Aug4th 155 call at .65
- Buy 1 Sept 150 call for 4.15
Breakeven on Friday – This trade does best with the stock at 155, near the previous high. Above that profits are capped. On the downside, the most that can be lost is 3.50 but that’s unlikely to happen entirely as the long call of this position has until September expiration.
Rationale – It’s unlikely we’ll see AAPL stock break out to new highs on the event itself. Even of that does happen this trade makes money. Ideally, the stock moves higher in line with the expected move, the 155 calls sold this week expire worthlessly and the Sept calls can be further spread after.