I am not going to go into to much detail as to why AAPL is down almost 8% from yesterday’s highs, as we have written fairly extensively on the potential for disappointment into this week’s events. Last week on 9/5/13 in the MorningWord, titled, Options Market Implying Movement for iPhone Event, I laid out what I saw as 2 scenarios for this week’s events:
First AAPL announces both the iPhone 5S and the 5c for developed markets, but do not currently have a CM deal in place, and the rumored Beijing media event does not happen, then I think there is a high likelihood that the stock sells off about 5-7% over the next few weeks, possibly back to the 200 day moving average as investors wait for the company’s fiscal Q4 results in late Oct.
Second the company does what the market now expects, releases both phones here and announces a deal with CM to sell the 5c at some point in the next few weeks to months and the stock likely sees a 5-7% or so pop in the weeks prior to Q4 earnings.
Obviously the first scenario played out. The stock is getting drilled as investors are less than excited about the evolutionary products and the lack of opportunity in a market they are currently getting beat up on in China.
The stock is at a very important near term technical level, sitting right on what is becoming the intersection of its 50 and 200 day moving average, also a level that was thought to be key resistance prior to Carl Icahn’s infamous Tweet on Aug 13th.
We currently have a large position in APPLE. We believe the company to be extremely undervalued. Spoke to Tim Cook today. More to come.
— Carl Icahn (@Carl_C_Icahn) August 13, 2013
AAPL has not set their fiscal Q4 report date, but estimates have it at Oct 24th, which would place the event in November options expiration. The guidance that they give for the all important fiscal Q1 (which will include the bulk of the new phone’s sales and the all important holiday selling season) will likely be a market moving event to the tune of 5-10%.
As mentioned above, the stock has now gone back and tested exactly what many technicians expected it to do and now we sit and wait for Icahn to get back in Twitter and analysts to once again figure out how AAPL will map out a road to earnings re-acceleration.
The one year chart shows the stock sitting right on the “level”. And this looks like a decent spot to set up an options trade that would benefit from the stock settling in, short dated vol declining, yet anticipating a steady increase in IV into the upcoming earnings event in Nov expiration.[caption id="attachment_30132" align="aligncenter" width="589"] AAPL 1 yr chart from Bloomberg[/caption]
Trade; AAPL ($467.50) Bought Oct/ Nov 500 Call Spread for 5.30
-Sold 1 Oct18th 500 Call at 5.80
-Bought 1 Nov 500 Call for 11.10
Break-Even on Oct Expiration: Profits are maximized at 500 on Oct 18th expiration. Slight moves above and below that strike are also profitable with big moves higher or lower putting the structure at risk of losses on expiration.
Trade Rationale: This structure is slightly long delta, in line with our view that AAPL is near important support, but is more of a bet in the next month that AAPL consolidates between 450 and 500 before the all-important Q3 earnings report in late October that will be captured by the November option. The vol differential between Oct and Nov is currently only a couple points, which is lower than we think it should be based on the pivotal nature of that late October event.