Upon announcing the iPhone 5, Apple (AAPL) rose over the next week from the $665 area to over $700 for the first time ever. After staying around $700 for a week or so, and peaking at $705.07, the rally ran out of steam shortly after the new phones hit stores, with the stock pulling back to around $675-680. Investors are now wondering if Apple will continue higher or if $700+ is "too far, too fast".
The after-announcement pop followed the trends of the previous iPhone announcements, as detailed in my article, "How to Play the iPhone 5 Announcement." There is no reason to believe the stock won't follow the post-release dip and beyond. For such a volatile stock, Apple is actually somewhat predictable.
For instance, the iPhone 4 was announced on June 7, 2010. Over the next two weeks, the stock popped about 11% and then retreated after the phone was released (sound familiar?). However, after the post-release drop, the stock stagnated around the pre-announcement level of $260 for about a month, and then began a steady, sustained climb in anticipation of the earnings announcement on October 18, 2010, which was to be the first reported earnings to reflect the iPhone 4 sales. The end result was a relatively quick move to around $310, which the stock held.
When the iPhone 4s was announced the following year on October 4, 2011, the stock popped 20.5% in the two weeks following the announcement. The stock was trading around $355 the day of the announcement, then climbed to around $425 over the next two weeks, and then retreated to the $390 level. Just like with the original iPhone 4 announcement, the stock stagnated after the initial pop and retreat, then as sales numbers began to show the iPhone 4 selling better than expected, it began a very steady climb from late December 2011, the next time it broke above $400, through late March 2012, when it broke through $600 for the first time. Looking at the chart of this time period, there were only a few down days during the peak selling months of the iPhone 4s.
The stock has followed the same pattern for the past three iPhone announcements and releases, and there is no reason to doubt that it will continue for the iPhone 5 product cycle. Any short-term dips in Apple should be viewed as gifts; incredible buying opportunities for a stock which should begin its rise to $800 and beyond in the next few months if history repeats itself once again. Consider playing Apple with intermediate-term call options. Since I expect the next big leg up in Apple to take place over a period of several months, I want to make sure I have plenty of time to let the rise happen. My favorite Apple trade at this time is to buy the April 2013 $675 call for $66.00 and simultaneously sell the $775 calls for $27.20. This creates a net cost of $38.80. Should Apple trade at over $775 next April, this would result in the maximum profit of $61.20, or almost 158% of the initial investment. This trade makes money if Apple is above $713.80 at expiration, which is only about $9 above what Apple traded at last week. I like this trade as opposed to an outright purchase of the stock because it gives you the upside of 100 shares for only $3,880, when a direct purchase of 100 shares will cost around $70,000.
Disclosure: I am long AAPL.