Hot Shots: Sour Green, Red Delicious Apple

What a session Thursday turned out to be; though not wholly unexpected. The VIX (^VIX) as readers of my other daily columns, both here at Optionetics and over at IBD know, was, amidst all the volatile headline hoopla this week, telling investors of higher prices for the market. While there’s never guarantees of course, analyzing the market’s most notorious sentiment gauge both quantitatively and qualitatively did strongly suggest fresh highs; which we continued to promote as the directional edge consistently over the past week.

A funny thing happened though on the way to investors indulging and almost unabashedly, their collective risk appetites, a not-so-little company by the name of Apple (AAPL) has fallen out of flavor or umm, flavor with investors. After a brief couple days atop the SP-500’s capitalization totem pole, shares have gone on to form a bearish island top pattern courtesy of a very rare earnings miss and weak guidance.

The price action is part of what many bulls would like to point out as a little hiccup within an existing uptrend. It could be of course. Yet, if we forget the larger brief burp from May 2010’s Flash Crash, shares of AAPL which have enjoyed the perks of growth stock leadership since its early 2009 bottom; haven’t yet faced the technical reality of a correction and base reset process, which currently stands at a somewhat long in-the-tooth count of four on the monthly chart.

According to the folks at growth centric IBD, stocks that have been in favor for long stretches of time and price are expected to correct in the neighborhood of 30% as part of a simple but healthy cleansing. Additionally, most of those once highly-favored stocks, once they lose a bit of their growth allure, go on to lose 70% of their stock value over time. Netflix (NFLX) is the latest example of that phenomenon.

Figure 1: Apple (AAPL) Monthly Gravity View

Why am I so cautious on a stock that’s been so good to so many for so long? Maybe that’s exactly the point and one we can easily appreciate on the monthly view shown in Figure 1. If a “mere” but healthy 30% correction were to occur that would put shares down into a challenge of the $300 and 38% retracement area. To me, that sounds like some food for thought to nibble on.

As well, the passing of visionary leadership, quite literally and sadly too, doesn’t help matters despite what I’m sure is a top notch team on all fronts within Apple. And how about the technical action in many of Apple's vendors like Triquint (TQNT), OmniVision (OVTI), Skyworks (SWKS), Cirrus (CRUS) and Qualcomm (QCOM)? All told, it's been less-than-endearing on those price charts.

Maybe too, a fear of gravity and AAPL falling further might have something to do with this admitted Luddite embracing a brand new, but slightly behind the curve iPhone4. I’m so fascinated by the ability to do things like tweet on Facebook and go on the World Wide Web to surf AOL; I can’t help but think the magic surrounding Apple has started to sour while still maintaining a shade of green by some market measures.

Figure 2: Apple (AAPL) OTM December Fly

The good news for bears, hedge hogs and bulls is that whatever your view, you’d be hard-pressed to come up with a limited risk option strategy which fails to match your expectations as Apple is one of the market’s liquidity linchpins with massive daily contract volume, literally hundreds of strikes to choose from, Weeklys and even LEAPS all the way out through January 2014.

One idea which takes advantage of Apple’s options wherewithal is a long butterfly strategy. A bearishly-positioned butterfly like the one illustrated above is put together with 4 x December 380 / 355 / 330 puts for about $2.25. Using a technical stop of 424 and what would amount to as a fresh all-time-closing high; the butterfly is able to keep the risk down to about half that amount over the next couple weeks. And should the AAPL fall further and succumb to a bit of Newtonian physics—it’s easy to see how “red” would be simply delicious for this type bear.  

Chris Tyler
Senior Staff Writer & Options Strategist
Optionetics.com ~ Your Options Education Site
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The information offered here is based upon Christopher Tyler’s observations and strictly intended for educational purposes only, the use of which is the responsibility of the individual.