Apple (AAPL) closed April 16 at $580.13, down 10% from its all-time high of $644. It is now down for five consecutive days, something that hasn't happened since last October. What is behind the selloff and what does it mean for the stock?
In one of my previous articles, I argued that Apple might have become a speculative stock. Today I must ask the same question I asked a week ago: What do we know today that we didn't know a week ago? What caused the stock to lose $65 billion in market cap in just one week? The obvious answer is: speculation.
Of course, we can argue about the exact definition of the speculative stock, but one thing is certain -- Apple has become a high-beta stock.
The Stock Became Much More Volatile
Apple's beta is currently 1.26. According to Investopedia, beta is "a measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole." For example, if a stock's beta is 1.2, it's theoretically 20% more volatile than the market.
Let's check the beta of few other popular stocks:
Google (GOOG): 1.09
Amazon (AMZN): 0.91
Netflix (NFLX): 0.66
Microsoft (MSFT): 1.00
As we can see, Apple is much more volatile than Google or even Netflix. For such a huge company, such high beta is unprecedented. And as proved in the last week, this volatility can go both ways. I just cannot imagine who was buying the stock at its high at $644, but they probably are not familiar with the greater fool theory.
There is no clear trigger behind the selloff besides a simple profit-taking. Looking at some comments on Seeking Alpha articles, you could think that this stock will just continue moving up 100 points every month. Clearly this is not the case.
So How Can We Benefit From It?
BalanceView presented few ways to play Apple's pullback. Regarded Solutions argued last week that the pullback might continue this week and could even become worse. Does it make sense to me? It is hard to say. There is the potential for Apple to continue its selloff down to its 50-day moving average at around 562, especially if the overall selloff continues. One thing is certain: The stock became much more difficult to trade and much less predictable.
High beta means high volatility. High beta also means that if the market pulls back 10%, the stock can go down 12%. It would push it toward the $500 mark, which might be one of the best buying opportunities. I definitely would not bet on it, but if you think it is not possible, think again. As proved in the last few days, no stock goes up in a straight line. Just think what will happen when 250 funds that own Apple will try to get out if they need to raise some cash.
If you are a long-time Apple investor, all this is just noise. Just follow the fundamentals and make sure to get off the train when the music stops. And believe me, it will stop at some point. We might be very far from this point, but you never know.
As a short-term trader, I always look for new opportunities. I would never short a stock like Apple, but rather play it non-directional. Check out my previous articles to see how.
Want to Play Earnings?
Apple has a history of decent pre-running runs. You could usually buy a call option about two weeks ahead of earnings and do very well. Not this time. Buying April or May calls a week ago would result in very heavy losses (up to 100%, depending on the strike). Another example of how dangerous it is to rely on past performance for future trades and how different Apple is today.
You want to buy those calls today and hold them through earnings? You might want to check first how they would perform historically (here's a hint: an average loss of ~20%).
One way to take advantage of the rising volatility might be buying a straddle or a Reverse Iron Condor. They are very expensive right now, but they might become even more expensive while we are heading closer to the earnings announcement next week.
I've recently shared a few non-directional ways to play Apple's earnings; you can check them out here.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.