We have it in stock. There is a bond. after that, apple. Big technology companies are an asset class. The iPhone maker has a strong balance sheet, dominates the market like a vice, and remains calm 20 years after the release of the first iPhone.
But that doesn’t mean the stock price can be pushed down by profits.
Don’t get me wrong, Apple is still a structural outlier in the big tech industry, especially when it comes to capital spending. Apple’s relatively low capital expenditures stand out as evidence of disciplined capital allocation at a time when its big-cap rivals are currently engaged in a relentless, capital-intensive arms race competing for infrastructure spending.
But major fundamental hurdles remain as Monday’s results approach. Although iPhone’s average selling price (ASP) is likely to rise, shipments are expected to decline due to harsh year-on-year comparisons and recent price increases. Additionally, alarming reports are circulating about “issues” with Apple’s much-anticipated foldable screen. Design and durability issues are unacceptable for a device with an eye-watering ultra-premium price tag. It’s hard to imagine that these whispers about manufacturing won’t be brought up in earnings calls.
In addition to sales frictions, there are also potential foreign exchange headwinds that could undermine international sales growth. When you combine these operational risks with Apple’s current valuation, the situation becomes volatile. AAPL currently trades at a forward P/E ratio of more than 40% premium to Amazon (AMZN) and a whopping 60% premium to Alphabet (GOOGL). This kind of hybrid work requires absolute perfection, and the past few weeks have shown us exactly what happens to focused technology companies that fail to deliver a perfect quarter, Alphabet and Amazon among them.
This is where the options market comes into play. As of now, Apple’s implied move through the weekend is less than $16.50, or less than 4.8% of the current stock price, and significantly higher than the median move of 3.25% over the past four quarters. In a season where earnings reports have hurt some of the market’s largest companies, this relatively low option pricing suggests that a long-term premium trade to print is the most prudent strategy.
Whether you want to hedge a long-term position in the underlying stock or simply speculate that Apple could become another victim of a tough earnings season, defining risk is paramount.
Trade: Buy a 345/325 put spread expiring November 6th for $5.95.
Important housekeeping note: Just two weeks ago, I outlined a somewhat bullish setup for Apple using a diagonal call spread risk reversal, specifically the technique of buying February’s 360 calls and selling December’s 310/375 trangrants. This strategy was designed to gain positive carry while maintaining upside exposure. This position is cautiously optimistic, but after watching last week’s earnings-related moves and the price of AAPL options expiring this weekend, if you don’t take that trade, the situation heading into this week’s quarterly earnings report may require a new, decidedly more defensive stance.
Disclosure: Tidal owns/holds all securities mentioned in the article.
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This content is provided for informational purposes only and does not constitute financial, investment, tax, or legal advice or a recommendation to purchase any security or other financial asset. The content is general in nature and does not reflect your unique personal circumstances. The above may not be appropriate for your particular situation. Before making any financial decisions, you should strongly consider seeking the advice of your own financial or investment advisor.
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