Up until recently, mega-tech had been a bunch of sleeping giants but no longer. After lagging for a while, the PowerShares QQQ Trust, Series 1 (ETF) (NASDAQ:QQQ) plowed into record territory this week. Strength came from the likes of Apple Inc. (NASDAQ:AAPL), Facebook Inc (NASDAQ:FB). Others such as Amazon.com, Inc. (NASDAQ:AMZN) and Alphabet Inc (NASDAQ:GOOG,NASDAQ:GOOGL) are also working on bullish setups.
The earnings season will undoubtedly make or break these set ups. An easy way to bet long this upside potential is with a blanket long position on the QQQ. But today I want to focus on AAPL based on a specific thesis — the Samsung (OTCMKTS:SSNLF) effect.
Yes, I know it’s been overly exposed. But I will share my personal experience to illustrate my thoughts.
For years, my household has sided with Samsung phones. Until we recently had a phone literally catch fire. In our efforts to fix the phone (and while dealing with the thousand hoops that were imposed upon us) we ended up switching phones makers and providers.
The point of the story is this: One out of the three new phones ended up being an iPhone 7. This wasn’t because we were shopping for it, but rather that it was suggested by the salesperson and offered free by the provider. Conclusion: AAPL will gain incremental business from Samsung regardless of who is shopping for what. It’s what they call “pin action.”
Fundamentally, I reiterate my statement that the AAPL machine will continue to offer an attractive stock value. But I have very little faith that Tim Cook is the right leader for it. What I do see attractive here is the technical upside potential. AAPL stock has the potential to retest the highs. The set up is available for the bulls.
The Trade: Buy AAPL Mar $120/$125 debit call spread. This is a bullish trade for which I pay $1.80 per contract. This is my maximum potential loss. If Apple stock rallies past my spread, I stand to double my money. Options are time sensitive, so the March contract allows 65 days to be proven right.
In this case, I want to hedge my bets by selling downside risk against AAPL value to lower my upside entry cost. I don’t do this, however, unless I believe in the value of AAPL stock against which I am selling risk.
The Bank: Sell AAPL Jan 2018 $90 put. This is a bullish trade for which I collect $3 per contract. Selling naked puts is dangerous and I only do it if I am willing and able to own AAPL stock at the strike sold. If AAPL stock falls over 25% I could be assigned the stock. In which case, $87 per share would be my breakeven price. Anything lower would accrue losses.
Since AAPL earnings are not due for two weeks, I will likely delay selling the puts just in case they decide to correct a little.
It is important to note that the short-term reactions to earnings is a binary event. Meaning it’s more gambling than investing. The quality of the report doesn’t matter as much as it should. Wall Street is unpredictable with its reactions.
Furthermore, markets in general are at all-time-high levels. So if Trump doesn’t deliver on much of his promises, we could see a market-wide correction. As long as my downside put level is not breached, any revenues captured from selling the long bet would be pure profits.
I am not required to hold trade into their expiration dates. I can close any of them for partial gains or losses.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @racernic and stocktwits at @racernic.
