When everyone turns negative on a particular stock at the same time and prices crash, there is a point where all the bad news is factored into the stock. In the case of Apple the news was so negative that shares sold off to $92 from the $135 high. I believe that was a severe case of overkill.

AAPL - Apple Inc Company Profile

Apple designs, manufactures and markets smartphones, tablets, digital music players, personal computers and smart watches internationally. If you do not know what Apple does you have been living in a cave somewhere for the last 20 years.

Apple's problem started about a year ago as analysts began to worry about competition from Andoid devices and saturation of the market for Apple devices. Hypothetically if the smartphone market is 500 million phones a year and Android's market share is growing, then Apple's saturation point is fast approaching or at least that was the theory.

Apple has continually surprised analysts with their sales growth. As the premium phone on the market there seems to always be new customers that want to trade up to an iPhone. Offsetting the total smartphone market limitation they are pushing into India, Africa and 3rd world countries that are seeing a rise in the number of consumers that can afford a $700 phone.

Apple released the model SE last week with a price point of $399 to try and combat their market share losses in poorer environments. Not everyone wants a giant Model 6+ to carry around all day. In Asia smaller phones are the most popular.

Analysts predicted sales in Q1 would decline for the first time in years. Apple also guided lower and shares crashed. Since then analysts have started raising their estimates for phone sales saying the estimates were too low and had become too bearish. The Model SE is expected to sell 35-40 million units in 2016. More than 1/3 of all active iPhones are 5/5c/5s or older phones and users have been waiting for an update with a 4-inch screen. Apple officially expects Q2 deliveries of the SE to be 5 million units but pre orders in China alone were 3.4 million so that estimate could be very low.

However, recent analysts believe that will not make up for the decline in 6s shipments. Some believe Q2 iPhone shipments of the 6s models could be only half of the Q1 rate. This is the bad news that pushed the stock price lower.

There are analysts with $200 price targets on Apple and the average target is $135. Of the last 6 ratings changes on Apple five of them have been upgrades to buy. One was a downgrade from buy to neutral.

I believe Apple will shake off this period of slow sales thanks in part to the release of the SE. They will also release the Model 7 versions in September. Apple shares typically rise into the announcement period.

Earnings are April 25th. There is sure to be a lot of volatility around that release. If they surprise to the upside on earnings the shorts will go crazy and an obscene spike could occur. If they miss and/or guide lower it could knock the stock back to the strong support at $95. Either way I believe Apple shares will be higher by the end of 2016 because everyone will buy the dip ahead of the Model 7 release.

I am recommending we buy the Jan $115 LEAP call, currently $6.90 and buy the May $105 put, currently $2.24. Our net debit would be $9.14. If the stock spikes after earnings we close the put for whatever we can salvage from it. If the stock drops after earnings, we sell the put for a profit and then sell short a LEAP put at a strike to be determined later. Hypothetically, a $10 drop would double the value of our long put to $5. We could then sell a $90 LEAP put, which would probably have a premium in the $6 range with a stock decline to $100. Under that scenario we would receive a $2.76 gain from closing the long put and $6 from the short put to give us about a $2 net credit for our long LEAP call position.

Ideally, we could just wait until after earnings to buy the LEAP call but we cannot be sure Apple shares will decline. They could spike $10 instead. Using the scenario above we could end up with a free LEAP call if Apple shares declined.

Conservative investors could just buy the call and hang on for the ride.

Buy Jan $115 LEAP Call, currently $6.90.

Buy May $105 put, currently $2.24

Additional position decisions will be made after earnings.




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