Event: Apple (AAPL) reports fiscal Q1 results Tuesday night after the close. The options market is implying about a 6% one day move. That’s essentially in line with the implied move prior to their Q4 results in October, after which the stock rallied 4%. The 4 qtr average one day move is has been about 4%, while the year average is about 5%.
I have been fairly clear about the risks to the AAPL story near term, so I am not going to go into that here, but I will add that in many ways I would rather be long AAPL than the S&P 500 (SPX) given their balance sheet, valuation, commitment to cash return (dividend yield in line with the SPX & the 10 year Treasury yield), dominant position in the high-end smartphone market and tremendous growth potential in emerging markets. That said…
The saturation in developed markets, and the potentially for a looming reset leave me sitting on my hands on the long side. I would also add that while the financial media will have you convinced that sentiment towards the stock is so poor, there is a mixed bag between investors who have sold the stock down 25% from its all time highs made last spring, and that of Wall Street analysts’ overwhelmingly positive sentiment (45 Buys ratings, 6 Holds and only 1 Sell). There’s also some diverging sentiment among the stock’s largest shareholders. To see that look at the latest filings, 13 (11 meaningfully) of the 20 largest holders reduced their stake in AAPL, while only 5 raised it (only 2 meaningfully):
I’ll save further fundamental thoughts for my earnings preview next week, but I want to quickly touch on the technical set up and offer a hedging strategy for nervous longs in to the print.
Technical Set Up:
Taking a look at the one year chart, the stock bounced Wednesday at an interesting support level, very near the stock’s open on August 24th. I would also highlight on the upside, the importance near term of $110, the level the stock broke below in late August, and then again late last year, paving the way for a 15% decline into Wednesday’s lows:
The five year chart shows the importance of $100, which was the top in September 2012. That failure in 2012 yielded a peak to trough decline of 45%. With AAPL now back at $100 that could become formidable near term technical resistance. I would add that the stock is now straddling the uptrend from the 2013 lows, with little support below:
And lastly, the 10 year chart, which depending how you draw the lines, I see the potential for a move back to the long term uptrend from the financial crisis lows, somewhere in the mid to low $80s:
Despite all of the positives for the stock, some think it will not bottom until Wall Street gives up on the story. If your desire is to hold onto the shares through any near term volatility, then it may make sense to look for ways to hedge against one last puke down to the long term uptrend in the low $80s, and possibly set yourself up to be able to add to your position on weakness knowing you are hedged.
One strategy is called a collar, where you sell an upside call and use the proceeds to buy a downside put against long stock, 1 call, 1 put vs 100 shares of stock.
Here is an example:
Vs 100 shares of AAPL at $100 Buy to open the March 110 / 90 collar for close to even money*
-Sell to open 1 March 110 call at $1.35
-Buy to open 1 March 90 put for $1.65
Break-Even on March Expiration:
Profits: gains of stock between $100 and $110, stock called away on March expiration at $110, up 10%, but importantly at any point you could buy back the call for a loss on the upside and keep your long stock position in tact.
Losses: of the stock between $100 and $90, but protected below
Rationale:
Market volatility is back in 2016 and it makes sense to use options to protect core holdings. This collar strategy protects against a breakdown in the stock and allows for tactical buying much lower in the stock with the existing shares hedged below $90. The risk to the upside is being called away in the stock but the short call can always be closed at a loss against any gains in the stock. The ideal situation is a move to 110 on earnings where the collar won’t cost anything in profits but will have provided protection through the event.
*Depending on where the stock is trading, and the bid ask of the calls and the puts, and obviously execution, this collar would cost about 25 cents, but for purposes of ease of explanation I am making it even money.
ONE MORE CAVEAT, WE THINK IT MAKES SENSE TO PUT THESE HEDGE STRUCTURES ON AS CLOSE TO THE EARNINGS EVENT AS POSSIBLE SO THAT YOU ARE NOT LEFT WITH UNREALISTIC STRIKES.