(Note: The author of this fundamental analysis is a financial writer and portfolio manager. He and his clients own shares of AAPL.)
Apple Inc. (AAPL) shares have climbed by nearly 20% over the past year, easily topping the S&P 500's return of 13.5%. Options traders see the stock continuing to rise through the summer months, by as much as 9% by the middle of September. That month also happens to be when Apple typically announces its new slate of iPhones; rumors are that this year may see as many as four new phones.
Apple's stock has jumped by about 10% to an all-time high since it reported better-than-expected fiscal-third-quarter results on May 1. Earnings for the quarter came in at $2.73 per share, over 2% better than estimates. Meanwhile, revenue topped estimates by about 40 bps, coming in at $61.14 billion. The better-than-expected results calmed investors nerves over weak iPhone sales sending the stock on a relief rally.
The long straddle options strategy set to expire on Sept. 21 is pricing in a rise or fall of about 10% from the $185 strike price. It places the stock in a range of $166.50 and $203.50. The number of calls outweighs the puts by a ratio of about 4 to 1, with 10,300 open call contracts to only 3,300 open put contracts.
The $200 strike price calls have an open interest of about 42,000 contracts and a cost per contract of about $4. The stock would need to rise to $204 to break even. It is a large wager, with a value of nearly $17 million. Since May 2, the number of open contracts at that strike price has climbed by almost 68% from just 25,000.
Apple shares technically have also broken out since its earnings report, sending the stock to an all-time intraday high of about $190. The stock now has a substantial support level in place around $180, which serves as a base for the stock going forward. The uptrend in Apple's stock is over a year old and has also served as solid support when tested. The relative strength index is indicating shares of Apple may be a little bit ahead of themselves, with a reading at an overbought level above 70 and maybe suggesting a short-term pullback.
Analysts Are More Hesitant
Analysts are not as optimistic as the traders, with an average price target of only $196, about 6% higher than the current stock price. Analysts have left their estimates for the full year relatively unchanged, upping earnings by less than 1% to $11.55 per share, giving the company 25.4% growth over last year. However, revenue estimates have been lowered by about 10 bps to $261.12 billion, providing the company growth of about 13.9% over last year.
For now, the options traders are optimistic the recent rally in the stock will continue through the heat of the summer months: That is, until the next wave of iPhone worries once again hits the market.
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.