Apple's Stock Outlook Overwhelmingly Bullish, Options Indicate

(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)

All this back and forth among the analyst community about Apple Inc. (AAPL) over the past couple of months is enough to drive anyone crazy, and make even the most confident investors confused. On January 23 JP Morgan saw more signs of iPhone weakness, while Morgan Stanley noted on January 25 that it sees limited risk of a guidance miss when the company reports its financial results.

While the analyst community continues to wring their hands over Apple's upcoming results on February 1, the options market is much more bullish, seeing the stock rising perhaps by as much as 17 percent by June, to a price around $203. 

The technology sector got a hot start to 2018, with the SPDR Technology ETF rising by about 7 percent. But Apple shares have underperformed by about 2.3 percent. All the back and forth regarding the success or failure of the newest iPhone X is confusing some market participants, and should Apple surprise Wall Street when it reports results on February 1, it could turn out to be a massive pay-off for traders playing the options.

AAPL Chart

AAPL data by YCharts

Long Straddle

The long straddle options strategy set for expiration on June 15, using the $170 strike price, suggest Apple shares could rise or fall by about 13 percent over the next four months. That is because the cost of buying one put and one call is about $21.40, meaning shares could trade between $149 and $192 by the month of June.

Bulls Outnumber Bears

But it is the amount of betting that makes the options market look so bullish, with $170 calls outweighing the puts by nearly 2 to 1, with 14,000 calls of open interest to only 8,000 puts. The notional value is enormous as well, with almost $16.6 million being placed on the calls, versus just $7.1 million for the puts. 

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Big Bets

The bets don't stop there, because there is almost $20 million being bet at the $175 calls, another $9.5 million at the $180 strike price, and nearly $10 million placed on the $200 calls. The puts do not see nearly the same amount of interest, as the table above shows. 

A 17 Percent Rise?

In fact, with nearly $10 million being bet at the $200 strike price, Apple shares would need to rise to about $203 just for the calls to break even, a rise of about 17 percent from the stock's current price. 

These are big bets being placed on Apple shares rising over the next couple of months, which means that the options market is either looking past all the hand-wringing analysts, or it is viewing any shortfall as short-term. 

To be sure, not all of the call open interest is because they are buyers of the calls. Some could very well be part of a covered called strategy, where investors that own the stock sell calls to take in the premium. But that would also mean those owners of Apple must be willing to give up their shares should the stock price rise above the strike price. 

Stay tuned, February 1 is coming fast. 

Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance. 

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