Goldman Sachs (NYSE:GS) had 1 (ONE!) losing day on the trading desk last month. Which is one more losing day, or infinite percent more, than JPMorgan Chase (NYSE: JPM). As penance for such disappointment, they give us this trading idea for Apple (NASDAQ: AAPL).
“Buy June $350 straddles for $19.40 (5.5%, stock at $349.45) ahead of June 6 Developer’s Conference; vol near all-time lows yet shares move more on this event than on earnings. Our Hardware Analyst Bill Shope rates Apple shares CL-Buy and sees 35% upside to his 12-month price target of $470. Apple shares are now trading at just 11X his 2012 EPS, a 50% discount to the average multiple of 22X, despite 22% growth in 2012, largely due to concerns around supply chain disruptions. We view implied volatility in June options as attractive, at just 21% which is near all time lows and a reasonable 4 points over recent realized, ahead of the June 6 Developer’s Conference.
“ … We’d buy inexpensive Apple options ahead of the Developers Conference. One month implied volatility of 22% is trading near historical low of 20% (going back to 1996) and versus recent realized of 18%. While options are trading 4 points over realized, typically rich for Apple, we see average move of -5% around the Developer’s Conference, combined with our analyst’s strong upside view on shares, as a key catalyst to buy vol, given the average daily move of shares +/-1.1%. If held to expiration, June $350 straddle buyers profit if shares close up 5.7% to $369.40 or down 5.4% to $330.60 on June expiration. Investors who hold straddles to expiry risk losing their entire premium paid.”
Let’s translate that. To buy the June 350 straddle the trader is buying both the AAPL June 350 Call and the AAPL June 350 Put with the belief that Apple will move, either up or down, beyond the purchase price. Yesterday the call’s last sale was $9.50 while the put’s last sale was $10.
The maximum loss is the premium paid. Apple needs to move either above $369.40 or below $330.60 by June 18 expiration for the straddle to be profitable.
So will this stock move?
Well, here’s the 30 day Implied Volatility vs. 20-Day Historical Volatility (AAPL stock itself) over the past 3 months.
Goldman’s description looks pretty accurate. Low options, and fairly normal to high premium to the volatility of the stock ltself. The trends don’t look great though. Here’s 10 Day HV.
AAPL really hasn’t traded above low 20’s volatility since late March.
Its not a real layup trade imho. When you buy a straddle like this one, you have to decide how to manage the position. You obviously get longer delta (share equivalent) as AAPL lifts, and shorter as it declines. So do you aggressively “delta hedge”, i.e. fade strength and weakness, or do you sit tight and let it play out? Well, if you agree with the GS analysis, you pretty much have to go with the latter. His call relies on a gap move around the Developer’s Conference. I grew up “delta hedging” as an AMEX market maker, so its not my sort of trade to sit and watch a straddle play out. But if you have the patience, this trade may fit.
Follow Adam Warner on Twitter @agwarner.