Apple Won't Let Investors Back In
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Apple (AAPL) won't let investors back in. After the stock bottomed on April 19, shares have rallied 15% with nary a dip to buy. I expect more price upside in the short term as managers who dumped their positions in March scramble to add exposure. More importantly, I expect AAPL's option implied volatility to decline in the coming months as expectations for the stock's volatility converge to broader estimates.
On Tuesday, AAPL sold $17B in the largest corporate bond offering in history. It's not clear how AAPL will invest its cash, but it seems premature to declare that the company is becoming another slow-growth, Microsoft-like sleeper. Apple's Jony Ive is said to have been leading a redesign of iOS, and the new version is expected this summer, and I won't be sold on the "slower AAPL" thesis unless we see lackluster product launches and no major innovation in 2013. But even if AAPL is entering a new phase fundamentally, changes to the company's capital structure should put a floor under shares and reduce return volatility in the near term.
Investors should look for AAPL's option implied volatility to decline relative to Nasdaq 100 implied volatility in the coming months. The attached chart shows that the ratio of one month implied vol estimates for AAPL and for the Nasdaq 100 has increased over the last year. If that relationship reverts to the mean, it would most likely be via a decline in Apple option premiums. In that context, even though AAPL implied vol is near a 6-month low, it's easy to see how lower levels are possible.
Trades: Sell to open AAPL July 390 puts at $5.10 and buy to open AAPL July 380 puts for $3.75.
We are selling a vertical put spread for July expiration given the outlook for flat-to-higher share prices and lower option IV.
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