Apple: Forget About $700 And Enjoy Range-Bound Purgatory

Sep.11.13 | About: Apple Inc. (AAPL)

Let me preface this with the fact that I firmly believe that Apple (NASDAQ:AAPL) is an excellent company that puts out superb products. I'm impressed with the company's in-house silicon design teams, and I can certainly see why many, back in the "Apple $1000" days, would frequently refer to Apple's products as "works of art". However, one thing everybody needs to understand that there are precisely two ways to make money off of "well known" Apple product launches:

  1. Buy CALLS about a week before the event and then unload them a day or so before the actual announcement
  2. Buy PUTS the day before the announcement (or on the day of the announcement) and ride the inevitable "sell the news" down.

That's really it. Apple has now joined the ranks of the "mega cap" stocks that will likely be fairly range-bound for many years. For cold-blooded investors and traders, this means that there's plenty of money to be made by selling puts and using the proceeds to buy calls at the bottom of the range, and by selling those calls and buying puts at the top of that range. It's not a "fool-proof" way to make money, but I'd say that it's a fairly high probability trade. Just ask the experienced traders of names like Microsoft (NASDAQ:MSFT) and Intel (NASDAQ:INTC). As far as I can tell, the range is $400 - $500.

The Apple iPhone 5S/5C Launches: I'm A Bit Surprised

I'll be the first to admit that even I was surprised by Apple's 5C/5S launches. On one hand, I can't help but respect Apple's commitment to "sticking to its guns" at the high end (and that A7 silicon looks really interesting). On the other, Apple did precisely the opposite of what the Street (and thus the exuberance in the share price) was anticipating.

For those of you living under a financial and/or technical rock, Apple launched two phones yesterday. The first, the iPhone 5C, is basically a colorful and cheaper-to-build iPhone 5. The next, the iPhone 5S, is a souped up iPhone 5.

In my view, this is actually a pretty interesting strategy, albeit totally not what anybody was really expecting. This looks to me, if anything, like a gross margin move. Instead of launching a next generation product and then selling its predecessor (with very expensive materials, to boot) at a discount, why not just discontinue the high end predecessor altogether and in its place sell a cost-optimized design? That's exactly what the iPhone 5C is about, and my guess is that it will help Apple's blended gross margin profile over the next few quarters.

The question, though, is whether it will help spur top-line growth. Again, not really sure. On one hand, less spendthrift but fashion-conscious consumers will probably welcome the 5C as it allows them to have the "latest" without actually paying for the top end model. Rather than meekly "admitting" that they bought the "older" iPhone, they can revel in the multicolored "inexpensive" wonders that they just saved a few bucks on. I think this will marginally improve Apple's sales, but it's not going to drive gangbuster growth.

For China and other emerging markets? This doesn't stand a chance. It's too expensive, and many people in these areas really don't have the "love" of Apple that folks in the US and other more "developed" nations do. They want phones that are reasonably priced and work well, and the hordes of low margin but still pretty decent Google (NASDAQ:GOOG) Android based phones will still rule the day here.


I applaud Apple for sticking to its guns and staying firmly in the "high end" with its product suite. This preserves its brand image, and quite frankly, I think that gross margins for selling a 5C will be slightly better than for selling an older 5. But will it drive sales? Maybe a bit in more developed/affluent nations, but these likely won't move the needle where price is a concern, and that's why Apple's shares sold off. But, who knows - if Apple had decided to go "full cheap" people would be whining about margins.

Apple shareholders, welcome to range-bound megacap purgatory. We're always happy to add more to the collective.

Disclosure: I am long INTC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.