I have written about Apple (AAPL) in the past from a bearish point of view (here) and luckily had a brief period of time being correct and took profits/reduced risk of the position. Some of the events I wrote about did come to pass unfortunately and it did not impact the stock like how I thought. I pretty much own a wide variety of products so it is not that I dislike the company in any manner or that they make an inferior product.
Average estimates for the September 2012 year-end are for $157 billion in revenues with high estimates of $171 billion. For 2013, projected revenues are an average of $184 billion with a high of $206 billion. This increase of $27 billion would be the equivalent of 41,538,462 new iPads being sold at an average price of $650.
One way of quantifying the $184 billion in 2013 revenue would be to think an average Apple product costs $1,000 and that 184 million units would need to be sold each and every year to sustain that revenue pace (no growth). If you consider the world's population at 7 billion and out of that maybe 4 billion are possible consumers to be generous would mean that 4.6% of the world's consumer population would need to spend $1,000 on Apple products in a year.
If you take that down to a personal level, ask yourself how much you spend on Apple products in a year? I do not spend 1,000 bucks on Apple products a year but would be more like 300-500 if you consider a Macbook Pro could last you three years and would need to replace that.
So if new product generation does not meet expectations to generate sales growth you have to wonder how revenues are going to reach $184 billion in 2013 and continue to grow at a pace to keep Apple top dog and a share price above $500.
If you are long Apple shares for the long haul could it not be prudent to look at a way of locking in your profits? If the average EPS estimates of $48 for 2013 are accurate it will take over 12 years of business operations for you to break even on a earnings standpoint. Just think about what has happened in the past 12 years in the economy and stock market and Apple itself and it puts things in perspective.
It may be a losing proposition to put on this trade and I may be grilled for doing so but I think its a way of getting some long-term bearish exposure on the stock in a hedged manner.
The two trades I am thinking of pairing together are both in January 2014 option expiration (prices were as of Friday close).
It involves a $600-750-$800 butterfly call spread at a 1:3:2 ratio and going outright long $550 puts for $97.95 or $9,795.
The net debit on the butterfly call spread is $35.05 or $3,505 and brings the total net debit of both trades to $133 or $13,300.
The butterfly call spread if Apple is above $800 in January 2014 will bring in $14.95 or $1,495 in net profits or 11.24% of the total net debit.
If Apple were to be at $750 in January 2014 then the net profits from the butterfly call spread would be $15,000 and would given the entire trade a profit of $1,700 per spread or $17.
The butterfly call spread is a way of providing some hedging costs to the long puts if Apple continues to float and defy gravity.
If Apple were at some put to fall back to say $450 due to economic concerns or broad market selling through 2014, you could sell the $550 puts for at least $100 or $10,000 but based on current option pricing should be around $175 or $17,500 per share.
This means you could simply sell the puts, be at a total net profit and have a play at the upside for free through 2014.
Given the closing price on Friday of $585, the maximum I can lose as outlined above is $133 per share if all positions expire worthless through 2014.
While the dividend and buyback program may not be as bullish as one may think, How often do companies buy back shares near the top of their share price and then collapse back down? There are plenty of examples in technology companies of doing this and one major example was Netflix (NFLX). Not saying Apple will make that big of a blunder but it also does not carry a zero probability.
I could easily be wrong about Apple as it continues on its path to maybe perhaps $1,000 per share but at this point I rather put on the play above and try for some potential profits in both directions of the stock.
Disclosure: I have no positions in any stocks mentioned, but may initiate a short position in AAPL over the next 72 hours.
Additional disclosure: Will not enter into the strikes mentioned above but may enter into other strikes in the same expiration.