Few companies are watched as closely as is Apple Inc. (AAPL), the people who put the iPod in your ear, the iPhone in your pocket and the iPad in your briefcase. Not to mention the MacBook Air on your lap and the iMac at home, where you write awesome pieces of music for your garage band.
And few companies experience the range of overwrought analysis as Apple does. With most companies, stock analysis is a cold and clinical game. With Apple, it's more a like a personal intervention with a friend who's clearly on the road to ruin and must be pulled back from the brink.
Apple on July 24 published earnings that came in 10% below analysts' expectations. The earnings were well above the comparable quarter a year earlier, as were sales.
Earnings were down from the previous quarter, for the second time in a row.
Click here to read Apple's announcement.
The market responded more to the analyst miss than the financials themselves. The stock gapped down by 4.4% overnight. The financial media were filled with headlines such as this from iStockAnalyst: "Has Apple ... become forbidden or low-hanging fruit for investors?"
Time to take a deep breath and look at things in perspective.
One way I assess the magnitude of a drop is by how long ago the stock last closed at that level. The gap brought AAPL down to June 28, when the stock closed at $569.05. That's only 18 trading days ago. This is not a decline of historical magnitude.
Some of the post-earnings analysis referred to the fact that the stock was trading below its $644 all-time high of $644. True, and the stock hit that price in April and has never traded close to that level since. So it's old news, and not of any particular relevance.
AAPL has been trading in a sideways range since April, with a ceiling at $630 and a floor at around $560, with one major week-long breakout below the floor down to $622.18 on May 18.
This morning's downside gap keeps the sideways range intact.
Very near term, AAPL began an uptrend within the range, rising on June 29 off of the prior-day's low of $565.61 and reaching a swing high of $619.87 on July 10. From there it began a very shallow correction, but had not hit a lower low within the uptrend.
The uptrend, in fact, remained in place, and even with the downside gap, still remains in place, as long as the price doesn't fall below $565.61.
Big picture, AAPL has been in a consistent uptrend since March 2009, and that uptrend remains intact despite the correction off of $644. The last leg up in this long-term trend began at around $360, and by the book, it would take a decline below that level to break the uptrend.
So, APPL is in a correction of an uptrend within a sideways trend within a correction of an uptrend. Sorry that the analysts were off by a bit. The AAPL chart says, "No big deal."
AAPL's options are trading well above their five-day average volume, by about 70% for calls and 80% for puts.
Today's trading is within the fair-price zone, which runs from $570.45 to $574.62 and encompasses 68.2% of trades surrounding the most-traded price, $573.07. The five-day fair-price zone was set before the downside gap and so is fairly irrelevant.
Implied volatility dropped sharply with the price, from the middle of the six-day range down to about a quarter above the low. It stands at 26%. That narrowing of implied volatility suggests that traders expect the worst of the the decline to be over.
Options are pricing in confidence that 68.2% of trades will fall between $531.33 and $615.77 over the next month.
One potential complication is that Apple declared a dividend. It goes ex-div on Aug. 13 for a payout yielding about half a percent annualized.
It's not a big dividend, and probably isn't enough to produce an early exercise of any calls that a trader has sold, but the possibility is still there, and must be taken into account. On the other hand, the ex-div date is close enough to the Aug. 17 expiration that early exercise would be no big deal.
Decision for my account: AAPL has long been part of my diagonal spreads strategy, and I hold an AAPL diagonal today: Long the January $555 call and short the August $635 call. The present low level of the stock means that my August short will expire unexercised and I can sell another call for September, reducing my basis still further.
If I were opening a new position (I'm not), I would play it as a bull put spread for credit, long the August $555 put and short the August $570 put. The position would be profitable down to $564, below the level that would invalidate the present near-term uptrend that's correcting. The potential maximum profit of the position is 64% of risk.
Disclaimer
Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.
No comments:
Post a Comment