(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
How successful will the iPhone 8 launch be for Apple Inc.'s (AAPL) stock price? The options market is pricing in shares of Apple will rise by nearly 7%, with an overwhelming amount of options traders betting the shares of Apple could rise to approximately $177 by October 20. If that should happen it would add nearly $60 billion to Apple's market cap bringing it to $906 billion, and closer to the infamous $1 trillion dollar market cap. (For more, see also: Buffet's Bet on 'Sticky' Apple Pays Off.)
Long Straddle Strategy
The options market is pricing in a move in the stock price of Apple of 6.5% based on the $165 straddle set to expire on October 20. The calls are trading at a price of roughly $5.00, and the Puts are trading at nearly $5.65. That means the market is betting that shares of the stock could fall to under $160, or trade above $170, that is a range of $10 or 7%.
Calls Are Favored 13 to One
When we look at the open interest in the contracts, it is heavily skewed to the Call side, with nearly 40,000 contracts open on the $165 calls, over 13 times the number of Puts. That implies the market is heavily betting that shares of Apple will rise to a price above $170, which is based on the strike price plus the premium paid for the calls. (For more, see also: Apple: The Opportunity We Have Been Waiting For.)
Up to $177
There are nearly 40,000 Call contracts open at the $170 strike, and 30,000 contracts open at the $175 strike. At a price of roughly $1.60 per contract, the $175 calls suggest Apple traders see them rising to roughly $177 by October 20. Implied volatility is high for the options as well, at nearly 22%, meaning traders are expecting high volatility in the stock. The S&P 500 options for October have an implied volatility of 9%.
The options market looks to be expecting a strong launch of the upcoming iPhone 8 and that perhaps the launch may do better than what the Street is currently modeling. According to the Website Sentieo, the average mean price target for Apple is currently at $171 per share.
Additionally, analysts have been pulling revenue estimates for Apple up since the start of the year as well, with the Street now looking for the company to generate revenue of $262 million in 2018.
The iPhone 8 is nearly here, and months of hope and hype will soon be in the rearview mirror—we shall soon find out how successful the new phone will be. For now, options traders are betting on it being more successful than expected.
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.