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AAPL: 'Tis the Season

There is no mistaking the love and affection consumers have for Apple (AAPL - Get Report) products. The wave truly began about a decade ago with the emergence of the vibrant iPod, a device that filled a tremendous need for digital and mobile freedom. Since then it has been one winner after another with iPhone, iPad and new/better versions every few months. With the recent passing of co-founder Steve Jobs there is some real doubt whether the company can continue on its blistering pace of product innovation. The one unmistakable mark on AAPL is the uncanny ability to skip through down cycles of the economy. It can sell products in good or bad times. So, as we embark on another uncertain holiday shopping season with so many wanting new devices are we likely to see AAPL products at the top of the wish list?

Since 2002 some of the best gains for AAPL have been in the last few months of the year. The earnings picture seems bright even though the company missed last quarter. Just 5% below the all-time high should not be too much effort to mount a run to new highs before year end. Sentiment for the stock is positive, yet as you can see in the chart below, there has mostly been sideways action. In fact, the coiled spring may be ready to unwind as it consolidates at the July highs. The tight formation will resolve soon. In fact, bollingers are contracting (not shown), which normally means a big move is imminent.

What makes me so bullish on AAPL here? Fund managers are now behind the curve, and with just under two months remaining, it's time to get it in gear to get some return. Typically money flows to the usual suspects -- who is more known or reliable than AAPL? That may sound complacent but it applies here. With strong seasonal trends providing the wind at the sails it should be a smooth ride up to $440, or so, by early January.

With Apple volatility relatively low option prices are rather cheap. You may not think so but with the high stock price the market is not expecting a big movement from Apple. Since I'm directional on the trade but do not want to lay out too much cash I will go with a bullish risk reversal play into January, buying the 405/430 call spread for $8.50 while financing the purchase by selling the January 330 put for $6.10 (strike is 13% below the price at a support level) for a net debit of $2.50.

A risk reversal is an options combination that allows you to participate in a directional trade without putting up too much cash up front. The structure is built by purchasing a spread (call or put) and helping to finance the cost of the spread by selling a naked option (call or put) and picking up a credit. I generally will look to sell an option far out-of-the-money as to alleviate the risk of having the stock put to me. The ideal situation is if the stock moves in the direction of the vertical spread and the short put decays allowing us to keep the credit. With a stock such as AAPL with very high priced options this is an ideal way to play but with time you have to be patient. We can get out of this trade at anytime of course, choosing to close the spread and buying back the short put. Additionally, posting margin is a requirement for a short option.

This trade has a potential gain $22.60 on a cost of $2.40 (940% winner). It affords us the chance to wait for the move to occur and letting the decay of the put work for us over time. Technically our breakeven is at $407.40. NOTE: The short 330 put requires margin but can be lessened by purchasing a lower put, say the 320 strike.

I'll be back with updates regularly on this position through the end of the year.
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AAPL $94.99 0.00%
FB $101.39 1.90%
GOOG $678.11 0.00%
TSLA $151.85 2.40%
YHOO $26.82 0.00%


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