Apple (AAPL) had $59.69Bn in revenues last quarter and that's up 10.9% while the rest of the economy was down 33% and the market logic is that one company making money trumps an entire economy losing money. Of course it's ridiculous but what can you do?
The chart on the right illustrates just how bad our Q2 GDP was compared to… well, history! This one-quarter drop in GDP was worse than ENTIRE RECESSIONS COMBINED yet the market is trading like we are going to just dust ourselves off and get right back into the race. Of course Apple did well – they sell exactly the kind of crap that people forced to sit on their couch for 3 months are going to buy. Amazon and other tech companies did well too because they cater to the shut-in crowds – you can't judge the economy or the market by what was bound to be the strongest sector.
Apple was our Stock of the Year 3 times this decade and, just two weeks ago, on July 17th, we did our Portfolio Reviews and we made aggressive adjustments to our AAPL position in the Butterfly Portfolio:
AAPL – We got more conservative but AAPL did not. The Aug $330s are $60 and they can be rolled to the Oct $350s at $50 so we're paying $10,000 for $20,000 more strike. Since our $200/260 spread is now net $144,000 out of a potential $180,000, it has $36,000 more to gain to cover the short calls. Still, we can do much better than that in two years so we'll cash that spread ($144,000) and move to 40 of the June 2022 $300 ($117)/400 ($65) bull call spreads at $52 ($208,000) so we're spending $64,000 to move from a spred with $36,000 potential to one with $192,000 potential – easily covering the short calls but also well-covered by them.
That was from yesterday's close so not much excitment so far but it's a net $400,000 potential on the bull call spread and, as of yesterday, the position was net $132,025 so this single position has $267,975 (202%) upside potential if AAPL remains over $400 for 2 years (and we manage our short calls). So, two years from now, if you wonder how our boring little Butterfly Portfolio can be making 100%/year – this will be the main reason!
That's what we do with the options positions in our Member Portfolios, we take SENSIBLE RISKS and then we make our adjustments based on FACTS that we gather over time. Facts about the Macro and Micro picture as well as facts about the companies themselves and the competitive environment they find themselves in. You can see our price-targeting and options-selling skills at work in the Butterfly Portfolio Review and they've done well into earnings season so far and AAPL was our biggest "risk" – and now it's paying off.
I put quotes around "risk" because I didn't consider betting that our 3-time Stock of the Year would be up 2.5% over the next two years to be a risky proposition. I did think Apple was a bit over-priced but we intended to improve our position on a downturn – or I would have sold the $500 calls, not the ones that were practically at the money. Still, this position is poised to make spectacualar gains – you don't need to make crazy long bets to make crazy profits!
Into the weekend, I'm very concerned about the Nikkei, which seems to be breaking down as the virus makes a comeback in Japan as well. Our market may be happy to pretend that things like this don't matter but we can't stop the rest of the World from being rational and Europe is also engaging in a similar pullback that, so far, has not affected the US markets.
We will continue to take these gains with a huge grain of salt. 3,250 was a great spot to short the S&P 500 early Thursday and it remains a great short this morning (/ES) with tight stops over that line as well as 1,485 on the Russell (/RTY). These are very stretched areas and it won't take much for us to have a serious pullback.
Have a great weekend,