Apple Ready For A February Sell Off

| About: Apple Inc. (AAPL)

Trading options requires a different set of rules than trading stocks. With Apple (NASDAQ:AAPL), an option should be owned following a dip when the probability of a catalyst run is imminent. Options lose money if the stock stalls and you get killed if the stock goes down. As I've said before, options are a great way to make money but not a great way to keep money.

To purchase a sizable position in Apple options right now would be a rookie mistake. Apple has now run $101 over a 73 day period. The stock is $38 higher than its prior high. Comparing these metrics to past performance reveals this run to be the highest in terms of total dollars (the second highest was $94 in July 2011), and the third highest in terms of duration (the highest was a 125 day run that ended the week of February 14, 2011) over the last two years. Is Apple closer to the top end of its range or is it closer to the bottom end? Rule #1 states you do not purchase Apple options at a top. Taking this Mega Run into consideration maintains our conviction that Apple stock should be utilized as we try and eke out the final gains, not options.

What kind of selloff are we waiting for? The average correction after a Mega High is $40 over a 14 day period. We do believe that Apple will experience a nice run in March that coincides with the iPad 3 release. An iPad 3 run would likely begin the same time it did last year, sometime around February 24th. That means we have 18 more days in the danger zone.

As is always the case at a Mega High, it is difficult to imagine a potential downside catalyst, but when the market is finally ready to correct it always comes up with the ammunition to do so. The worst thing we could do would be to abandon our strategy and fully load the portfolio. The minute we buy a 50% allocation of AAPL options it would put us at severe risk of losing all prior profits. I know how strong the temptation can be to buy back in but remember that the last 10 Apple runs were followed by 10 selloffs. Stock prices never go up forever. Especially Apple. Last year at this time it was Libya and Saudi Arabia which caused an oil spike and subsequent correction. What will it be this year? So far no negative catalyst has been able to provoke the market. The European crisis is tired. Investors are indifferent to Greece. The violence in Syria is being ignored. Employment is improving. Housing seems to have bottomed. It will be interesting to see which negative economic variable takes the stage in February.

As we wait for the selloff, Apple fundamentals continue to show remarkable strength. According to the NPD group the iPhone 4S, iPhone 4, and iPhone 3GS took the top three spots for U.S. smartphone sales in the holiday quarter. The Samsung Galaxy II came in fourth place. Hearing this kind of data is mind boggling. It confirms the thesis that Android was only gaining traction because the iPhone was exclusive to AT&T. The Tim Cook market share legacy is happening before our eyes. In another piece of news, Halliburton announced that it is transitioning from the Blackberry platform to Apple's iOS. Halliburton employs 70,000 staffers in more than 70 countries. It has taken Halliburton five years to decide to make the transition which is typical for the enterprise sector. How many more Halliburton's are out there for Apple? Enterprise adoption represents at least a 5-10 year moat for iPhone dominance. The iPhone market share story is firing on all cylinders.

Disclosure: I am long AAPL.

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