The last couple days in AAPL have been very eventful. To start off the weak, AAPL reported very strong earnings that beat all of the streets estimates. The main headline was the 61 million iPhone figure and the 27% EPS growth Y/Y. In addition to that, the share repurchase program was increased from $130 billion to $200 billion. This is all very impressive and shows why AAPL is a phenomenal company. The question is, why has AAPL sold off $7 peak to trough in the two days following? I think the answer is, peoples’ expectations are very high for AAPL and because AAPL did not give any surprises there were no new buyers for the stock. That is a big problem; everyone that likes AAPL probably already owns it. And anyone that does not own AAPL is probably not convinced by this earning report to change their mind. This leads to a stalemate between the bulls and the bears. How should we play this?
I think the way to play this is to respect the new trading range that AAPL is in. We do not yet know the bottom of the range as AAPL has not yet had a meaningful bounce, however, I think that if we get down to 124-125 we should see a sizable bounce. That level has held for over a month and has attracted any buyers (and would also be a $10 pullback).
Ways to play a bounce in AAPL:
1) This is a very simple strategy, just sell an ATM put spread. If lets say AAPL dips to 127, sell the 126/127 put spread (May 15th Expiration) for a round $.45-$.50. This will give you a 1:1 risk reward, and you would only need AAPL to be above 127 (or whatever the short strike is) on expiration to collect the full premium.
2) Buy an OTM call spread. What you could do is go $2 OTM, so lets say AAPL is at 127 tomorrow morning, buy the may $129/$130 call spread and pay around $.30. This would give u a 2:1 risk reward. The reason this trade is more risky then the bull put spread mentioned above, is that this trade needs over a $2 move to just breakeven where as the first trade does not need a move to make money
3) Buy a 127 May risk reversal. This strategy is more complex and involves a big margin requirement. What you would do is sell the May 127 put to buy the May 127 call. By doing this you are forced to buy AAPL stock if it is below 127 on expiration, yet because you are selling the put, you get to own the calls for a $0 cost. I would only do this if you are someone that is fine owning AAPL stock in your portfolio.
I think AAPL still has more room to the upside, but I think we had our major explosive move higher already, I do not see AAPL gaining another 20% this year. At this point I think it will be slow and stead up to the $143 figure ($1 trillion market cap). Therefore, I favor playing AAPL for smaller moves, either by selling put spreads, or just selling naked puts.
thanks max!