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Let me begin by saying this: I think that Apple (NASDAQ:AAPL) is one of the greatest companies in history. I love the company and own some of its products. But I wouldn't trade it right now.

In this article, I will try to describe the price action on Apple from an options trader perspective.

In order to understand the current situation with Apple, let's take a look at the recent price history of the stock:

  1. The stock was trading at $380 around Christmas.
  2. It climbed all way to $425 in the (usual) pre-earnings run.
  3. Following the earnings release on January 24, it jumped to $450.
  4. It continued consolidating in the $450-470 for two more weeks. So far so good. Excellent earnings, healthy reaction. But look at the stock since mid February:
  5. The stock climbed another $130 in one month. That makes it 30% gain in one month and 60% in three months. IV (Implied Volatility) of the options jumped to 41%.

The simple question is: What do we know today that we didn't know a month ago? Some people would argue that funds were buying the stock in anticipation of the dividend. That argument simply doesn't hold. A $10 yearly dividend means nothing for a stock that can move that much in a matter of minutes. Are you telling me that the stock rallied $130 in one month in anticipation of a $10 dividend?

How about the new iPad announcement? Well, I didn't see anything special about this announcement. How was it different from the previous products? It is an excellent product, but so was the previous iPad. The new iPad did not include any new or revolutionary features or new technology. In fact, the announcement should have been a disappointment. Yet people waited in line to get it as fast as they could.

Is the price simply catching up to the fundamentals?

I would accept that argument if the 30% rise happened during 3-4 months. But a 30% rise in one month (on top of the previous 25% rise which was also pretty quick) is just insane.

Market history is filled with moves that defy logic as the charts "go parabolic." Those moves usually have 3 things in common:

  • They go further than one would expect.
  • They never last.
  • They usually end really, really badly.

So how can we explain the latest move? Usually those moves are caused by late investors and traders who feel they have missed a great opportunity and are convinced, or just hope, that the price will continue to rise for a while.

Unfortunately, in most cases of parabolic moves, those who join the party late buy the shares of those informed traders and investors who have already made significant gains and are ready to move to the next target. When they decide to sell part of their remaining portfolio, then the late comers, who are usually weak hands, panic and try to sell at break-even or just below that.

Since joining Seeking Alpha four months ago, I shared quite a few Apple trades with my readers. Here is the full list:

  • The Bull Credit spread from December 13, 2011 produced a 42% gain in 6 weeks.
  • The Iron Condor from January 10, 2012 produced a 28% gain in 2 weeks.
  • The Bear Call Spread combined with the weekly RICs from February 14, 2012 produced a 15% gain in 5 weeks.
  • The Iron Condor from March 5, 2012 produced a 18% gain in one week.
  • The Long Butterfly from March 19, 2012 produced a 35% gain in three days.

The last trade was especially spectacular. One of my readers executed the trade using slightly different strikes and made 45% in two days. This example clearly showed you how you can make big money by understanding the Implied Volatility and lose big money by ignoring it. For example, if you purchased the April 2012 600 calls on April 15 when the stock was at $585, you would be actually losing money by now even after the stock climbed $17. The reason? The IV collapsed from 41% to 31%.

So what's my next trade on Apple?

Every bubble has a top. Are we close to the top?

Frankly speaking, I have no idea. Valuation-wise, Apple still might be cheap. As long as the company continues to perform well, the stock should perform well too. But I do know that there is no logical explanation for a 30% move in one month. I also know that Apple just became too unpredictable. The only trade that makes sense to me right now is some kind of daily trading - a straddle or a butterfly. Since I'm not a day trader, I will just sit tight till the stock gets back to "normal".

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: Why I Wouldn't Trade Apple Right Now