Now that the earnings event has passed, I can re-allocate more risk to trade Apple Inc. (NASDAQ:AAPL) stock. It’s not that I was worried about the fundamentals, but I usually fret the short-term Wall Street reaction to earnings reports.
Even if we had a preview of the company P&L, we don’t know how traders will interpret earnings results. Expectations are hard to chart, therefor they are hard to accurately forecast.
AAPL results were exactly as I expected: Boringly impressive. They were boring because they blew all metrics out of the park, as I expected them to. This speaks more to their forecasting ability than over-achievement. Wall Street is rewarding it though with a new all-time high near $160 per share.
Nothing in this Apple report changes my opinion of the mid-term outlook for the company fundamentals. It will still be the envy of most other corporations. The business is incredible healthy…
Perhaps AAPL is too healthy for its own good, so it doesn’t feel the urgency to take risk venturing into new things. Sure they’ve made public statements about interests with International Business Machines Corp. (NYSE:IBM) and the Uber of China, Didi Chuxing. They even bought a headphones company. But none of these could eventually replace or challenge the iPhone as the golden goose for them.
I keep referring to Amazon.com, Inc.’s (NASDAQ:AMZN) Jeff Bezos, who never announces his plans of next domination. He just takes the risks and reaps the rewards. Surely the success ratio is not one-to-one, but he only needed a few hits to deliver hyper growth, AMZN-style.
Few experts deny that AAPL is still an iPhone company, but that’s not a bad thing … Yet. The sales metrics that come from iPhone sales are staggering, thereby buying Tim Cook time to find the next big thing.
Even though I don’t think Cook is the right guy, luckily I have other factors that allow me to trade AAPL stock bullishly here. First I have the financial engineering that are dividends and corporate buybacks. Those are guaranteed support for the stock.
Click to Enlarge Second and more recently, we got Warren Buffet’s announcement that he is into Apple stock. Sure he is late to the party, but we all know he has conviction in his investments. For years he believed in IBM and defended his position. So I am confident he will also defend AAPL stock and even more vigorously.
He buys on bad days and that is the definition of support — support against which I add bullish exposure to Apple today.
AAPL Stock Trade Idea
The Trade: Sell the Oct AAPL $135 put for collect $1.60 to open. Here I have an 80% theoretical odds of success. But if price falls below $133.40 I have to own the shares and accrue losses.
So the worst-case scenario for this trade is that I end up owning Apple stock at a 13% discount from today’s level.
For those who prefer more limited-risk exposure I can sell spreads instead. There my maximum loss is not the zero line but the lower end of the spread that I sell.
The Alternate Bet: Sell the AAPL Oct $135/$130 bull put spread. If the spread wins, it can deliver a hefty 15% yield. With equity markets this high, this is a more comfortable way to be bullish than buying AAPL shares at face value and with zero room for error.
There is always risk in equity markets, so I never bet more than I am willing to lose.
Learn how to generate income from options here. 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.
