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Kim Klaiman is a full time options trader and founder of He trades mostly non-directional strategies, like pre-earnings strangles and iron condors. Likes to trade strategies with negative correlation. He lives in Toronto, Canada. Visit the forum.... More
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  • Why Your IPhone Cannot Be Made In USA 14 comments
    Mar 24, 2012 1:17 AM | about stocks: AAPL

    Look at the back panel of your iPhone. You will see "Designed by Apple in California. Assembled in China."

    Many Americans, including the President, wondered why Apple (NASDAQ:AAPL) is manufacturing virtually all its products abroad. Last year Obama bluntly asked Steve Jobs what it would take to make iPhones in the United States. "Those jobs aren't coming back," said Mr. Jobs.

    What is the real reason for this?

    The New York Times asked the same question. A simple and scary answer is: iPhones are not made in America because they cannot be made in America.

    The Manpower

    How can it be the deficit of manpower? After all, America has over 8% of its population unemployed. Why Apple can't employ at least some of those people?

    The iPhone is assembled in Foxconn City in Shenzhen, China, which has 230,000 employees. Do you know how many cities in US have population more than 230,000? The answer is 82. But not the whole population can work. On average, working-age population is 65 percent of the total population. It turns out that only 50 cities across the country have enough working age population. However, even in New York, the largest American city, 230,000 people are 3% of the total population. Can you imagine three out of every hundred New Yorkers working at iPhone assembly line every day?

    Over the past couple of years we have heard a lot about working conditions in Foxconn factories. This Chinese company is responsible for the assembly of consumer electronics for the majority of large companies, including Apple. Approximately a quarter of the 230,000 employees live in factory's dormitories or barracks. Almost 60,000 people live and work at the factory. Many people in the Foxconn City work 6 days a week, 12 hours a day and earn less than $17 per day. Perhaps such conditions seem brutal to most Americans, but jobs at the plant are very popular. Jennifer Rigoni, a former Apple's worldwide supply demand manager, said that Foxconn can hire 3,000 people a day.

    The plant has 8,700 engineers who control the process. According to the reporters from the Times, it would take as long as nine months to find that many qualified engineers in the United States. The Chinese have hired them in 15 days.

    "We shouldn't be criticized for using Chinese workers," a current Apple executive said. "The U.S. has stopped producing people with the skills we need."

    The Cost

    People who advocate outsourcing argue that one way or another it is related to the price. "Make it in America will come more expensive" ​​they say. "You have to pay higher salaries, give bonuses, pay insurance, pay higher taxes." As companies operate for profit, the increased cost must be reflected in the consumer price.

    They say that iPhone assembled in the U.S. will cost thousands of dollars. It turns out that is not true. According to the Times, paying American wages would add up to $65 to each iPhone. And all other additional expenses are not likely to cause a 16G iPhone 4S to cost more than a thousand dollars without a contract. But not even the price is the main reason why Apple is manufacturing in China. The main reason is that companies need plants that can rapidly produce as many iPhones. This requires flexibility and quick adaptation to the demands of Apple.

    The Infrastructure

    The Times gives an example from the early history of iPhones. It is hard to believe now, but Apple originally designed the iPhones with a plastic screens. Steve Jobs was carrying a prototype of iPhone in his jeans, along with his keys, and the screen of this prototype became covered with dozens of scratches. "I won't sell a product that gets scratched. I want a glass screen, and I want everything to be done perfectly in 6 weeks."

    Jobs was not joking. If the product will not meet his standards, it will not go to the stores. To make this change in the States would take several months. In China it took 6 weeks. Corning (NYSE:GLW) started to supply scratch-resistant glass, and Chinese factories were able to quickly integrate it into existing iPhone design.

    "The speed and flexibility is breathtaking," a former Apple executive said. "There's no American plant that can match that."

    The Conclusion

    Apple is an American company, reaping unprecedented financial success. So many Americans are distressed over the fact that the country gets very little of this success. Apple employs 43,000 people in the States. This is less than one-fifth of wage-workers in one Chinese factory. Some might say that Apple has succeeded at the expense of American workers. But if you believe the Times report, it turns out that the United States had never even had the infrastructure and the manpower that Apple needs.

    P.S. This article was rejected for publication by SA Editors, so I'm publishing it as InstaBlog
    Stocks: AAPL
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Comments (14)
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  • glworden
    , contributor
    Comments (141) | Send Message
    Why do you think the article was rejected? Very informative. perhaps because it's not an actionable trade idea?
    8 Feb 2012, 11:52 PM Reply Like
  • SteadyOptions
    , contributor
    Comments (2697) | Send Message
    Author’s reply » This is what they said. But I see many articles on SA which don't have actionable ideas. They also said it doesn't have any new info.
    9 Feb 2012, 09:13 AM Reply Like
  • WSLama
    , contributor
    Comments (116) | Send Message
    And according to Steve Jobs, the US just does not have enough qualified engineers and technical workers that Apple needs.


    You have an option education group? How to access that?


    9 Feb 2012, 02:28 PM Reply Like
  • SteadyOptions
    , contributor
    Comments (2697) | Send Message
    Author’s reply »
    9 Feb 2012, 02:30 PM Reply Like
  • untrusting investor
    , contributor
    Comments (9903) | Send Message
    Good article. Excellent summary of some of the key issues about Apple manufacturing.
    24 Mar 2012, 08:17 AM Reply Like
  • Mark Campbell
    , contributor
    Comments (45) | Send Message
    All valid points. I would also litigation to the list. In the US if a worker gets hurt even through his own stupidity the company can be on the hook for a few million dollars. In China if a worker gets hurt you just get a new worker.


    I wouldn't add regulation to the list because Apple puts a great deal of requirements on its subcontractors.
    24 Mar 2012, 06:55 PM Reply Like
  • 50k
    , contributor
    Comments (5) | Send Message
    Great article, I think this sort of writing is just as valuable as a trade idea.
    27 Mar 2012, 01:50 PM Reply Like
  • dogworth
    , contributor
    Comments (115) | Send Message
    Hey Kim
    How are you. I want to thank you and ask for your input which would be educational for myself and perhaps other similarly inexperienced traders. Brilliant results from AAPL. I was first introduced to Augen's work and volatility plays by your recent articles. I would like to share my volatility play for educational purposes and to pick your brain if possible. I played a long strangle into earnings with a delta of 40 (1 contract each way bought last Friday planning to sell the entire strangle just before market close 24th). Volatility was high to start so Theta eroded my position significantly. Today, 3 hrs before close, my put was $500 up and my call at $590 was down 60 % to approximately $1100. I sold to close the put for $500 profit. I held on to the call to write a modified strangle to play the volatility meltdown post earnings. My modified strangle write was short a put at $525 (premium was $2500, which I keep) I am short a call at $575 which combined with my protective long call at $590 loses $1000 with AAPL at $601 in after market. So I am $2000 up on an overall cash outlay of $2000 if my calculations are correct. Tomorrow pronto I plan to buy to close the $575 short call and hold the $590 long call which is 2 strikes in the money to ride the wave, I mean tsunami to come. I hope the stock does not keep running pre-market because I may run into cash flow trouble to buy to close my in the money $575 short call although my loss on that leg is capped by the $590 long call and implied volatility collapse is likely to affect the $575 call more than the $590 call further mitigating my "loss". A wild ride. I wish I had invested more, but retrospective knowledge and serendipity are not predictable. Kim, thanks for the education. This was a volatility play that had to be modified by market conditions. I owe you a beer. My amateur perspective on this is that this would not have worked out for me as a pure volatility play, liquidating both arms of the long strangle today and writing a strangle to play the post-earnings volatility decay. I would have lost significantly. I was not knowledgeable enough to consider iron condors and reverse iron condors. Perhaps as I learn more I'll look more closely at those structures. So that's my 2 cents worth. Thanks for the 2 grand. Any comments?
    25 Apr 2012, 12:02 AM Reply Like
  • dogworth
    , contributor
    Comments (115) | Send Message
    Anesthesiologist and part time investor. I approach investing like snowboarding. I buy at the top and ride the losses all the way down, eg. RIM.
    25 Apr 2012, 12:09 AM Reply Like
  • SteadyOptions
    , contributor
    Comments (2697) | Send Message
    Author’s reply » Well, your results were definitely excellent, but you took a huge directional risk. Of course one could argue in hindsight that the blowout quarter was expected and it was a free money. I don't think this is the case. I never play earnings directionally, was burned too many times. Eventually those directional trades will bite you badly.


    My volatility play didn't work out this time. Like you said, IV was too high to begin with.
    25 Apr 2012, 10:18 AM Reply Like
  • dogworth
    , contributor
    Comments (115) | Send Message
    Thanks Kim. closed the May 575 short call at $41 today at a time premium of 5.40 for an implied volatility of 29 (41 % pre-earnings). I wasn't particularly bullish on the stock pre-earnings. I just didn't have the heart to sell my pre-earnings call 60 % down. Psychologically always harder to sell a losing position. Worked out by pure luck. I am starting to think that statistical volatility is much less important than immediate price movement in determining implied "volatility". My call lost 60 % on the price movement 2 % down rather than any significant change in volatility per se. I am still trying to wrap my mind around the volatility concept. Definitely lots of potential here for an educated investor. Take care...
    25 Apr 2012, 12:37 PM Reply Like
  • dogworth
    , contributor
    Comments (115) | Send Message
    Kim I've been analyzing my play. There may be a strategy here. I'd be interested in your take on this. If I buy a strangle prior to earnings. Why not close only the winning arm of the strangle just prior to earnings day close and convert the other arm to an iron condor as I did to play the volatility crush post earnings. Granted I did not protect the bull credit spread wing of the condor, but I could have. In this case, I deliberately did not because I would have been fine if the contract was put to me at $525 given apple's fundamentals. So, why not take profit on the profitable wing of a pre earnings long strangle before earnings and use the other arm to complete an iron condor to play the volatility crash post earnings. Commission would be less than 2 separate plays long and short volatility targeting pre and post earnings closures as you would be trading one less component of the structure. In addition you would have locked in the profit on the winning arm of the long pre-earnings strangle. One would have to plan the strikes well though. I'd be interested to know your take on this. It netted me over 100 %, an anomaly perhaps, but maybe beginner luck has stumbled on something here...
    25 Apr 2012, 03:47 PM Reply Like
  • SteadyOptions
    , contributor
    Comments (2697) | Send Message
    Author’s reply » My question is very simple: ignore for a second the winning part of the strangle. Think of the IC as a completely new position. Do you want to own it prior to earnings? if the answer is yes, then go for it. But don't do it just to salvage the losing trade.
    25 Apr 2012, 04:16 PM Reply Like
  • dogworth
    , contributor
    Comments (115) | Send Message
    Logical as usual, Kim. Thanks.
    26 Apr 2012, 01:04 AM Reply Like
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