After an earnings report that was tepid at best, shares of Apple Inc. (NASDAQ:AAPL) had a extremely muted response. AAPL stock was down only 45 cents, or 0.31%, with a trading range of barely more than 3 points. This type of complacency is the hallmark of a looming consolidation period in Apple as investors look to take a pause before either taking the stock higher or lower.
I expect AAPL stock to trade sideways over the coming month as the gridlock continues.
The earnings report for AAPL was assuredly a mixed bag, with earnings of $2.10 exceeding consensus of $2.02 (although matching the whisper number of $2.10). Revenues were a tad short at $52.9 billion compared to expectations of $53.1 billion. More importantly, Q3 revenue guidance was about $2 billion on the light side, with Apple steering towards $44.5 billion. China sales were notably weak as well.
Click to Enlarge On the plus side, Apple now had a cash hoard around $250 billion dollars (although much of that is trapped overseas for now). Stock buybacks were upped to $210 billion from a previous $175 billion while the dividend was increased by 10.5%.
Sporting a 17.6 price-to-earnings ratio, AAPL stock is no longer dirt cheap but still trading at a discount to the overall market.
A quick look at past reactions to earnings in Apple over the past two years shows just how small the earnings reaction turned out to be. Normally AAPL stock has a much larger pop or drop and is prone to be earnings gaps on the chart. That’s certainly not the case this quarter in Apple.
Click to Enlarge I think the slowing growth in AAPL stock (especially given the mega market cap of $765 billion) along with a P/E ratio approaching multiyear highs will serve to put a lid on any appreciable rally in Apple over the next several weeks. Conversely, the increased stock buyback program, free cash flow and increased dividend (not to mention the $250 billion in cash) is likely to create a floor for any meaningful sell-off in AAPL stock. Look for Apple stock to be range-bound between $140 and $150 for the next month.
So with little movement expected out of AAPL, an iron condor trade is the way to play. This combines selling an upside out-of-the money call spread and also selling a downside out-of-the money put spread to collect option premium of both sides.
AAPL Stock Trade Idea
Sell the AAPL June $150/$155 call spread for $1 net credit or better and sell the AAPL June $140/$135 put spread for 35 cents net credit or better. Total combined credit equals $1.35.
Maximum gain on the trade is $135 per condor, obtained if Apple sits between $140 and $150 at June expiration, while the maximum risk is $365 if AAPL stock is above $155 or below $135 at June expiration. Return on risk is 37%.
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.
