There are stocks, there are bonds, and then there's Apple. This tech giant is in itself a category of asset. The manufacturer has a fortress-like balance sheet, nearly unbreakable control over its market, and even 20 years after the release of its first iPhone, it still maintains a "cool" image.
But this doesn't mean that this stock won't be influenced by the market during the financial reporting season.
There is no doubt that Apple remains a structural outlier among large technology stocks, especially in terms of capital expenditure. At present, its market-cap giants competitors are engaged in a costly arms race in infrastructure, while Apple's relatively lower capital expenditure reflects its prudent allocation of capital.
However, as the financial reports for Monday approach, substantial fundamental obstacles still exist. Although the average selling price of iPhone ( ASP ) is likely to rise, shipments are expected to decline due to a more challenging year-on-year comparison base and the impact of recent price increases. In addition, there are reports circulating in the market about "problems" with Apple's much-anticipated foldable screen. For a super-high-end product with an astonishingly high price, design or durability issues are unacceptable. It is hard to imagine that these rumors regarding the manufacturing process will not be mentioned during the financial report conference call.
In addition to the friction on the revenue side, unfavorable foreign exchange conditions may also erode international sales growth. When these operational risks are considered alongside Apple's current valuation, the situation becomes more nuanced. Based on forward price-earnings ratios, AAPL currently has a premium of over 40% compared to Amazon (AMZN), and a premium of as high as 60% compared to Alphabet (GOOGL). Such valuation multiples require perfection, yet recent weeks have shown what can happen to large tech stocks that carry significant weight but fail to deliver perfect quarterly results; Alphabet and Amazon are among them.
This leads us to the options market. Currently, the implied volatility for Apple by the end of this week is less than $16.50, which is about 4.8% of the current stock price, significantly higher than the median volatility of 3.25% over the past four quarters. In a season where some of the largest companies in the market experience selling pressure after releasing their financial reports, such relatively high options pricing suggests that buying option premiums and engaging in long options trades before the financial reports may be a more prudent approach.
Whether you want to hedge your existing spot stock positions or simply bet that Apple will become another company to suffer during the tough earnings season, defining risk is of paramount importance.
Trading Strategy:Bought a November 6 expiration 345/325 put spread at a cost of $5.95.
Important Notice:Just two weeks ago, I recommended a slightly bullish structural strategy for Apple, which involved taking advantage of the potential reversal in the risk of price increases—specifically, buying March 360 call options while selling December 310/375 straddle combinations. The strategy was aimed at maintaining an upward exposure while also generating positive holding gains. That position was cautiously optimistic, but after observing the market fluctuations related to earnings reports last week, as well as the prices of the AAPL options that expire this weekend, if you did not execute that trade, then before this week’s quarterly earnings reports are released, it may be necessary to re-evaluate the market approach with a more defensive stance.
Disclosure:Tidal holds all the securities mentioned in the text.
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