How To Play The iPhone 5 Announcement

Sep.11.12 | About: Apple Inc. (AAPL)

Apple (NASDAQ:AAPL) is widely expected to announce its newest version of the iPhone on Wednesday of this week. The question is whether or not the announcement of the iPhone 5 is already factored into the current share price, or if there will be a pop afterwards. Let's consider the historical data:

The last time the iPhone underwent a major revision was the iPhone 4, which was announced on June 7, 2010. Apple was priced at $250.94 at the time of the announcement. Over the next two weeks, the stock gained 11.2%, peaking at a high of $279.01 exactly two weeks after the announcement, before retreating a bit, eventually settling back around $250, so this was a temporary pop. This is a chart of Apple's stock price during this time:

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That's all well and good, but what if Apple disappoints investors, much as it did when it announced the iPhone 4s? For those who don't remember, the iPhone 4s announcement was widely expected to be the iPhone 5, and there was a letdown among Apple enthusiasts who had been anticipating it. Surprisingly enough, the same pattern repeated itself, only more than before. After the initial announcement of the iPhone 4s on October 4th, 2011, the stock hit an intraday low of $354.24. Over the next two weeks (note that this is the same time period as the market reaction to the iPhone 4), the stock steadily climbed to a high of $426.70 on October 17th. So, when Apple announced the 4 and pleased the market, investors were rewarded with an 11.2% pop. When Apple disappointed the market, shareholders got a 20.5% pop!

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Now, I am by no means expecting Apple to disappoint the market. This announcement will almost definitely be the iPhone 5. However, this just adds to the likelihood that Apple will pop in the 2 weeks following the announcement.

I recommend playing the iPhone 5 announcement with a vertical spread, taking advantage of the volatility that comes with market anticipation of an announcement. Apple closed at $662.74 on Monday, so averaging the two post-announcement pops I discussed, I anticipate a 15.9% pop in the two weeks after the announcement to be the most likely scenario, which would mean a $768.12 target. I don't think this price will be sustainable for much longer beyond the two weeks, but that is the number to watch.

To bet on another pop after the announcement, look at the October call options. Buy the October 665 call at $24.50 and sell the October 700 call at 11.00, for a net debit of $13.50. Maximum profit of $31.50 ($45-$13.50) on this trade is achieved if the stock is anywhere above $700 near the expiration date, which would be a 233% profit. The best part of this trade is that the maximum loss is capped at $13.50 no matter what the stock does. If history repeats itself, this trade could be a low risk, very high reward situation for those who still believe (like I do) that Apple has significant upside from here.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in AAPL over the next 72 hours. 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.