Apple Inc. (NASDAQ:AAPL) reported earnings Tuesday of $3.38 per share on revenues of $78.35 billion. Both of these metrics were significant beats as consensus expectations were $3.22 EPS and $76.2 billion in sales. Apple stock initially shot up nearly 9 points, or 7.5%, post earnings and briefly traded above the critical $130 before pulling back.
While the earnings report certainly was solid, the reaction of AAPL stock was a case of too far, too fast. I look for Apple stock to continue to have difficulties moving appreciably higher over the coming months.
As mentioned, AAPL reported a stellar quarter. While revenues beat tempered analysts expectations, the actual revenues rose by only 5% year over year. Important to add that this quarter had an extra weekend in the reporting period, meaning overall revenue growth was rather stagnant.
With any company, but especially the largest U.S. market cap company such as AAPL, the law of large numbers certainly begins to apply when projecting future growth. With Apple now trading at the highest price/sales ratio (and the first time over 3) in the past year, investors are paying a hefty comparative price for AAPL stock.
A P/E comparative paints a similar picture, with AAPL stock now trading above a 15 multiple.
Technically, AAPL stock definitely looks toppy at the $130 level. After a stunning 20% rise from the Nov. 14 lows of $105.71, Apple stock encountered some significant resistance at the $130 level. This was a major area of resistance back in the first half of 2015 as well.
Apple is also extremely overbought, with a 14 day RSI well over 80. Previous instances when AAPL was this overbought proved to be significant short-term tops in Apple stock. Yesterday’s price action, with the stock trading higher only to reverse and close lower on the day, also points to exhaustion in the rally.
While I am not looking for a dramatic pullback in AAPL stock, I also think the rally has gotten more than a little ahead of itself. A period of sideways consolidative price action is likely in store.
One of the benefits of options is that you can structure a trade to make, as Dire Straits famously said, money for nothing. So to position for AAPL to struggle to head higher over the next month, a short-term bear call spread makes intuitive sense.
AAPL Stock Trade Idea
Buy May $145 calls and sell May $140 calls for a 60-cent net credit or better.
Maximum gain on the trade is $60 per spread with maximum risk of $440 per spread. Return on risk is 13.63%. The short $140 strike price is nearly 9% above the Thursday closing price of $128.53 and also well above the $130 resistance level.
I would close out the trade on a significant move to new all-time highs on AAPL while looking to let the spread expire worthless and keep the initial $60 premium if AAPL remains well behaved.
As of this writing, Tim Biggam did not hold a position in any of the aforementioned securities. Anyone interested in finding out more about option-based strategies or for a free trial of the Delta Desk Research Report can email Tim at tbiggam@deltaderivatives.com.
