On Tuesday, September 12th Apple (AAPL) will introduce their 10th Anniversary iPhone, coupled with a refresh of their 7s/Plus lines plus the possibility of a new Watch that would work independently of an iPhone. For the better part of 2017, a year in which AAPL’s stock has gained 37%, or more than $200 billion in market capitalization, the talk has been of an impending supercycle for iPhone upgrades, a product which has for the last year made up about 60% of the companies total sales. The most recent rumors have been that the high-end 10th-anniversary device will have production delays and will not ship at the same time as the refreshed iPhone 7 & 7plus (will be dubbed S). This is all pretty well known and likely “in” the stock at current levels. What is not known is how impactful will short supplies be for the current quarter that ends in a few weeks and how much will the Dec quarter pick up of any demand that is pushed out? Your guess is as good as mine, but for those with hefty gains in the stock or considering new longs into what will be three events (unveil, launch & fiscal Q4 results due late Oct) it might make sense to consider defined risk long strategies.
First, let’s take a quick look at the technical set up. The stock has healthy near term support near the convergence of the uptrend from the November lows and last quarter’s breakout level in the low to mid $150s, but below that there could be an air-pocket to the low $140s:
Often times when we consider long stock replacement strategies we look to do so when options prices are relatively cheap. The one year chart below of 30 day at the money implied volatility shows options prices in AAPL ticking up near 2017 highs, well before earnings as one would expect, but also just as the stock has recently come off a new all time high, this might signal a sense of investor nervousness prior to the events.
This set up though provides opportunities to consider options strategies like butterflies that help offset elevated options prices, especially into predetermined events for those looking to take a long premium directional view.
If I were inclined to play AAPL long for the next two months I might consider the following trade idea:
Trade: AAPL $159 buy Nov 160/170/180 call butterfly for $2
-Buy to open 1 Nov 160 call for 6.75
-Sell to open 2 Nov 170 calls at 3 each or 6 total
-Buy to open 1 Nov 180 call for 1.25
Break-Even on Nov expiration:
Profits: up to 8 between 162 and 178 with max gain of 8 at 170
Losses up to 2 between 160 and 162 & between 178 and 180, with max loss of 2 above 180 or below 160
Rationale: this trade breaks up $3, less than 2% from the trading price and offers a max potential payout of up to 4x the premium at risk, or about 1.3%. So very near the money participation with minimal risk in front of three potentially volatile events, next week’s product unveil, the actual launch of the products later in the money and fiscal Q4 results due the last week of October.