AAPL – How About a Nickname – Red Dawn or Red?

I think it’s time we gave Apple (~$420.60) a nickname. The stock has become as significant culturally and economically as IBM, so if IBM is Big Blue, I feel like AAPL should be Red Dawn or simply Red. The stock is so intriguing because of its cultish following and because the stock is so expensive and volatile. It is also interesting that this stock is, uniquely, a growth stock and a flight to safety stock at the same time. There are only about 5 other stocks that fall into the category in my best estimate.

Heading into earnings, I would be shocked if AAPL doesn’t blow it away, which is why I think the stock is a long term buy , a temporary sale, and not worth the earnings risk. While I cannot be certain the stock is going to sell off— the combination of sales information that is already available, the release of GOOG’s earnings (a glimpse into smart phones), and huge run up in the stock over the last week— the risk and reward do not add up.

If AAPL somehow manages to blow away already high estimates of earnings and even higher whisper numbers, it might rally 20-25 dollars. If the stock does not blow things out of the water, it is going to head right back to 390.00 or possibly lower. 

If I were holding AAPL stock, I would do what is called a buy-write synthetic: I would dump my AAPL stock to lock in profits, and with the October 425 calls trading around 12.50, I would simply buy the calls as a replacement. If AAPL takes a dive, I lose on the calls, but I can buy my stock back on the cheap. If AAPL rallies the 25 bucks the straddle is priced in, I only gave up 12.50 of the move.

With the run-up we have had, I think one would have to be a fool not to do some sort of unwind and protect play; this is probably the best option.

Mark Sebastian

mark@optionpit.com

http://www.optionpit.com/blogs