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  • Earnings For Apple? Put Your Money Where Your Mouth Is! My $32,000 Gambit! 15 comments
    Jan 20, 2013 12:42 AM | about stocks: AAPL

    Apple is broken? But does Jan exop offer relief?

    The market makers pin AAPL at exactly 500.00 for Fridays major leap expiration, and the twitter world goes nuts and SEC investigations are in full throttle on "channel check" news releases.

    Where does that leave us going forward?

    Most technical indicators show Apple as a broken stock. Negative sentiment is rampant and driven by articles coming from all outlets including the Wall Street journal.

    However, the wall street shakeout of weak owners is officially over starting Monday, the 21st.

    I personally haven't traded Apple since last May, but ever since early December, as the stock continued to tank and Q1 earnings got closer and closer, I have been taking a hard look at this stock.

    I have a full-time day job and "trade" only when I see tremendous opportunities. The last 45 days I have been researching Apple at least 6 hrs a day, on top of my normal job.

    So let me start with some predictions, which will conclude with a detailed disclosure of my current option positions.

    Apple Pre-Earnings -> Next 3 trading days

    Expect Apple to possibly have one down day either on Monday or Tuesday depending on the news cycle and analyst commentary, and 2 up days with Wednesday being at least 2% up.**** correction, Monday is a closed market day. I would expect two up days Tuesday, Wednesday and still target for a 520-535 Wed close.

    Wednesday 23rd Close -> 520 - 550.

    Apple Earnings Forecast:

    I have read pretty much every article available on the internet, including professional & independent analysts, and precursor numbers with reports from apple (release weekend sales / xmas day activation numbers), T and VZ reports. I have put these numbers into my own model.

    Here are my numbers:

    *see new estimates with this blog post: http://seekingalpha.com/instablog/942177-sheluvme/1476731-revising-my-apple-eps

    Revenue: 60.5 Billion

    iPhones: 51 million units

    iPads: 27 million units (11 million minis though don't expect breakout of this figure)

    GM %: 39.0%

    EPS: 15.10

    This will no doubt be considered a monster beat.

    Apple Guidance Q2:

    Probably even more important than their actual earnings is the guidance Mr. Oppenheimer will offer.

    *Revising on 1/22. Due to larger than expected accelaration of iPhone units in Q1, I think this will have a negative impact on Q2. I expect them to advise somewhere near last years actuals for EPS. Lowering revenue and EPS target. Additionally, lowered GM to a more conservative forecast.

    Revenue: 43 Billion (~9.5% increase y-o-y)

    GM %: 38%

    EPS: 12.50 (~1.6% increase y-o-y)

    This guidance although still very conservative , i think will be considered extremely bullish by the street, especially because of the improving margin.

    Other Predictions:

    1. They will downplay the stock performance because they don't pay attention to that and does not factor into decisions on share repurchase or dividends. They are focused on delivering products.

    2. Don't expect dividend or share buyback announcement. They will start a trend where this gets announced in Q2 - April report out, which will be approximately the 1 year anniversary of their dividend program.

    3. They will crush "weak demand" "channel checks" as not accurate. Any supply changes are from changing product mix, adjustment to inventories, and from supplier switches.

    Post-Earnings:

    Expect volatility for at least 1 week after. Negative sentiment will try to critique the quarter and future quarters from all angles.

    However as we hit early Feb bulls will have full control as the March product cycle approaches. Expect improving investor sentiment, more positive news cycles, and "reconfirmed buys and reconfirmed price targets above 700 by analyst".

    By Feb 13th, 2 days before the next major expiration, I predict apple will be trading between 590 and 675, with my target at 625.

    My Gambit:

    First things first. These option trades are only a small portion of my gains that I made last Jan - May. This is only my options trading account and is not my standard portfolio. I do not advise anyone to take the amount of risk I am taking with these positions as I am willing to take a 80% loss if my thesis is wrong.

    (click to enlarge)Apple Options Position

    1/3 of this position was built the last week of December and 2/3 positions have been built the last 2 days. The earlier position is already down significantly, and if I liquidated at the Friday 500 close, it would be about worth $25,000, which already represents a 21% loss (32,000 cash put in).

    If apple trades to 625 on Feb 13th and even when I adjust for a 10% volatility decrease, the positions will have a value of > $150,000.

    If it trades to 675, positions will be worth $415,000. If only :)

    Anyways, I hope with my worst case scenario, I am able to exit at a break-even, but I would need Apple to be at least 550 by early Feb. Anything lower and losses become steep, very fast.

    After 6 hrs a day for last 45 days, I do hope I do not have a confirmation bias, and my predictions are at least close.

    You have to get in the head of the managers of the 200 largest hedge funds. They will begin to push their cash to work and turn Apple into a bull again.

    Check back with you next week for an update. I hope you enjoyed this instablog.

    Disclosure: I am long AAPL.

    Additional disclosure: All my Apple positions are disclosed in position image.

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Comments (15)
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  • palminator
    , contributor
    Comments (31) | Send Message
     
    Is it "great come back" time again? I see Apple products in Walmart and on TV. The distribution channels seem full. It doesn't feel like a good time to bet the farm.
    21 Jan 2013, 09:08 PM Reply Like
  • Rebecca21
    , contributor
    Comments (53) | Send Message
     
    I am long Apple. I think I can match you with reading articles about six hours a day since November! Many of the negative stories are clearly misinterpreted. One Chinese person on line, 50% screen cut, and the like. If I only read articles, and looked at the apple stores, and not the stock price, I would have much less to worry about. My only concern with your article is that you stated that this quarter is a week longer than last years? Did I read that right? Everywhere else it says this quarter is a week shorter which has to be taken into consideration.
    21 Jan 2013, 09:14 PM Reply Like
  • apple_investor
    , contributor
    Comments (183) | Send Message
     
    14 week quarters are only once roughly every 6 years. 52 weeks = 4 quarters of 13 weeks each = 364 days. Since that leaves an extra day every year, and 2 extra days every leap year, Apple adjusts with a 14 week quarter every 5 or 6 years. That extra week is always going to be in FQ1 so it ends on Dec 31, like last year. This quarter will be 13 weeks.
    21 Jan 2013, 09:33 PM Reply Like
  • Dialectical Materialist
    , contributor
    Comments (4458) | Send Message
     
    I think you're going to end up pretty pleased.

     

    But that looks like it's larger than a $32k gambit. Surely you must have money backing those sold puts? The balance is listed at almost -$70k, so you must have enough funds to cover. And these are funds that are tied up in this adventure, aren't they? Don't want to sound critical of the strategy. It is a gamble, but you already know that, so why not go for it?

     

    The more units Apple sells, the better their margins will be. So I suspect if they really crush expectations to the upside on revenue, their margins are going to be stronger than most people realize.

     

    I'm pretty much all in on this earnings call. If it flops, I will go back to more boring stocks and get out of options all together, at least for a while.

     

    21 Jan 2013, 11:33 PM Reply Like
  • Sheluvme
    , contributor
    Comments (104) | Send Message
     
    Author’s reply » Hi Dialetical, you model the puts in an options calcualator. The bull put spread on apple is almost too good to be true.

     

    It is a great way to play a short term trade and not get burned on implied volatility and have some time decay protection as well.

     

    Anyways as of Friday close prices, a 525 buy to 675 sell put for Feb 16th expiration offers the following:

     

    13,840 net credit, which is also your maximum possible gain
    1,280 maximum possible loss

     

    so if you had 10 grand cash to back the puts, you can net credit ~9 spreads for 124,560$

     

    and how does the trade unfold? 10 days before expiration, with a 10% decrease in volatility, my breakeven is 527.

     

    YESSSS 527
    100% Gain at at 550.

     

    800% gain at 650

     

    so while the upside is slightly:) limited compared to owning like a 625 call option, i still think this is the best way to play feb options.

     

    you can see most of my capital for my calls are in the april and march periods which have volatility around 35%, which historically is not that bad. When march product cycles get closer those volatility will increase and will help the option prices.
    22 Jan 2013, 09:21 AM Reply Like
  • huthutho
    , contributor
    Comments (224) | Send Message
     
    "The bull put spread on apple is almost too good to be true."

     

    If it so appears, then "caution!"
    22 Jan 2013, 03:18 PM Reply Like
  • Valueplay98
    , contributor
    Comments (580) | Send Message
     
    I hope your trades work out for you.

     

    Fridays Pin at 500 was open interest at 500 in calls and puts at 100k + each, and nothing else was even close. Close EXACTLY at 500.00 ? Who says the market isn't rigged ...
    22 Jan 2013, 04:09 PM Reply Like
  • Sheluvme
    , contributor
    Comments (104) | Send Message
     
    Author’s reply » agree, but market makers saw a particular opportunity with that jan expiration(s).

     

    most traders are on the sidelines for a wait and see for earnings. therefore i think much of the volume we have seen in the last 10 days, are the same funds buying and selling to push towards their Open Interest contracts.

     

    If the market could always be "controlled" like this then apple would always trade to wherever the highest OI is at for a given expiration, and we know that doesn't always happen.

     

    OI evolves at the date gets closer and the underlying stock prices moves. market makers have to liquidate and open new positions.

     

    anyways, post earnings, I still see a surge of strengthening sentiment and apple bulls taking full control of the stock by early feb.
    22 Jan 2013, 04:54 PM Reply Like
  • Keneo2
    , contributor
    Comments (5) | Send Message
     
    I cannot imagine how you could expect Apple to EPS guide to 12.50 in their March quarter when they only guided EPS to $11.75 in their December quarter. Thats just insane.
    Last year, Apple guided Dec quarter EPS at $9.3 and the following March quarter at $8.5. The March quarter was a 9% drop from their guidance of December quarter.

     

    I think a more reasonable expectation for march EPS guidance would follow the same drop. so $10.74
    23 Jan 2013, 04:53 AM Reply Like
  • Sheluvme
    , contributor
    Comments (104) | Send Message
     
    Author’s reply » true, I am being a bit hopeful that they saw how negative their guidance was perceived on q1. Let us hope for at least 12.00 EPS.
    23 Jan 2013, 06:21 AM Reply Like
  • Keneo2
    , contributor
    Comments (5) | Send Message
     
    You are hoping that Apple will change? Have you even met Apple?
    if Apple guides above or anywhere near their q1 guidance of 11.75, I will eat my own head. it's exactly these kind of unrealistic expectations that have -time and again- hammered this stock down when it should be up at 600+ right now . Astonishingly, you are not are only one hoping guidance will be 12+

     

    For at least a decade Apple has -without fail- issued ultra conservative guidance. not once have they missed their guidance. But today all that will change? good luck.

     

    i was hoping that todays ER would help get the stock back up where it belongs but it seems analysts have unwittingly sabotaged that again. maybe I will go short.
    23 Jan 2013, 04:01 PM Reply Like
  • endobrendo
    , contributor
    Comments (5) | Send Message
     
    Could somebody help a me (a newbie) understand what the negative quantities mean for your Feb. 16 $675, $700, and $750 Puts?

     

    Does this mean you've sold puts rather than purchased them?

     

    Thanks!
    24 Jan 2013, 05:52 AM Reply Like
  • Sheluvme
    , contributor
    Comments (104) | Send Message
     
    Author’s reply » Hi Endobrendo,

     

    I sold puts via a bull put spread. This helps limit maximum loss and protect time decay and volatility. The maximum gain is what I receive from the credit.

     

    Apple is currently trading at 450. If you bought a 475 put and sold a 550 put you would get a net credit. Your maximum loss would probably be like 2,000, and maximum gain (the credit) would be like 8,000 (approx numbers).

     

    Your best case scenario is that both options expire and apple is trading above 550.

     

    You can do a bull put spread in fashion. Such as 400 - 500 spread or a 440 - 450 spread. Each spread has its own max loss, max gain potential and essentially carries different risk based on that for the spread that you setup.
    24 Jan 2013, 04:35 PM Reply Like
  • Sheluvme
    , contributor
    Comments (104) | Send Message
     
    Author’s reply » btw, I am probably staring at a 90% loss at the moment. I have not had the courage to even log in and check my account. I will wait 1 week and see how apple trades and then decide how I may roll out of my positions.

     

    although the earnings from apple clearly disappointed a lot of people, and their guidance wasn't very warm either, I will look for any type of recovery off any rebound in the next weeks. I will post my final losses when I have exited the trade.
    24 Jan 2013, 04:38 PM Reply Like
  • Valueplay98
    , contributor
    Comments (580) | Send Message
     
    AAPL earns 14$ - goes down 10%

     

    NFLX earned 13 cents (.65 if it was a 500$ stock) and goes up 40% - imagine if AAPL had gone up 40% ?

     

    I had some butterflys (pre-EPS) and added more today - will add another one every 10$ or so. Defined risk - small amount per trade. And if AAPL makes a comeback over the next few months - huge rewards. The Jan 14 500-550-600 fly was like 5$ today when I was looking at it (at 460 or so).
    25 Jan 2013, 01:37 AM Reply Like
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