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Apple Straddle

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I have thought the long-term prospects for Apple (AAPL) looked like a repeat of the mid-to-late 1980s for some time. The company made some smart changes relative to the 1980s having developed an ecosystem, not just hardware. Even so, the fact that AAPL relies so heavily on gadgets could be the companies downfall.

The iPhone is no longer light years ahead of its competitors, and same thing may apply to the iPad. The iPad Mini is to the iPad what the Nano was to the iPod (not a harbinger of success). Bascially, if AAPL doesn't become Microsoft (MSFT), it may end up like Sony (SNE), unless it can invent a new product that everyone in the world wants, thus the iWatch!

I haven't seen an iWatch. I am sure its perfectly nice and almost as certain that it will bomb. As soon as I saw the 'portable phone' in the 1990s I thought it was cool, practical and something that everyone would want. Why would someone want a cell phone-watch hybrid? Better yet, why would someone pay $500-$1,000 for one. I spent a little time on eBay (EBAY) today looking at watches in that price range and there were some pretty nice ones. I liked this one in particular for $989.00:

Unless AAPL develops a classy watch, I wont be able to wear it for dinner or formal events and will probably need a phone ALSO. I have an even harder time envisioning many women embracing something like an iWatch. A phone is a necessity, while a watch is an accessory (one that is coming back in style). At the end of the day, I don't think this new product is going to be something that launches AAPL back to $600. Furthermore, the stock is not going to $1 trillion market cap. Sorry folks, SOLD.

Earnings are coming up in a few weeks and I have to say, I think the straddle is SHOCKINGLY cheap for the July 26 contract month. According to Livevol, aggregate IV is only 36% in that contract month and that is about normal for AAPL in a non-earnings expiration. Looking at the straddle price, I can buy the July26 425 straddle for $24. I think it should be trading closer to $30 with two weeks until earnings and would be shocked if one of the following DOESN'T happen:

1. The straddle catches a bid

2. AAPL starts to move and runs away from the straddle

3. The straddle holds value until July 25.

Long term I am bearish the stock, but in the near term I am bullish the volatility. I think it makes A LOT of sense to go long the July26 straddle. I have 425/430 strangle on in that contract month and Andrew has added the straddle to the Option Pit Strategy letter. With the constant interest in this name (still) I think a straddle trade makes sense, especially as a trade against a basket of long premium.

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At the time of publication Mark Sebastian had a position in AAPL.

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