We tried this position a couple weeks ago but bailed on the play after Apple cut component production by 30% for Q2. That was the right decision since Apple shares imploded on the earnings and guidance. After the drop from $112 to $92, I think it is time to go back into this position.

What investor in the market today has not heard about the decline in iPhone sales and the Q2 cut in component production? All of Apple's ills are now common knowledge and anyone that wanted to sell the stock, probably has already sold it.

The long term uptrend support is about $85 and the short term support is $92.50. In theory it would take a lot more volume to push it significantly lower.

Apple currently trades at a PE of 10. They announced a 10% increase in the dividend and a $50 billion increase in stock buybacks to $250 billion. If they are going to buy back stock and support the stock price this is the logical place at a two-year low and at support.

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 Android 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 4-inch model SE 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. When they actually reported earnings that missed estimates, shares crashed again. iPhone sales declined to 51.2 million, down -16% from the year ago quarter. It was the first year over year decline in iPhone sales ever. Apple guided to sales of $41-$43 billion for the current quarter and analysts were expecting $47 billion.

Apple is having a couple bad quarters because the iPhone 6 was such a success and the iPhone 6s did not have any must have features that made people rush out to upgrade again so soon. The iPhone 7 to be announced this September is rumored to be feature rich so people are simply waiting for the next model to make their upgrade decision.

Apple shares normally rally in Q3/Q4 on those product announcements. This year should be no different except we are starting out from a much lower base.

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

I am recommending the January $100 call, currently $5.50. If you want to offset some of that premium you could sell the $75 put, currently $2.54. The odds of Apple shares being under $75 by January are very slim. Conservative investors could just buy the call and hang on for the ride.

I do not plan on holding this position until January. Typically, Apple shares peak on the release date of the new phone. They announce the phones in September and begin delivery in November. We will exit a couple days ahead of the delivery date.

Buy Jan $100 LEAP Call, currently $5.50, no initial stop loss

Optional

Sell short Jan $75 put, currently $2.54, no initial stop loss
Net debit $2.96.




If you like the trade setups you have been receiving and you are on a free trial then now is the time to subscribe. Don't wait until you miss a newsletter to decide you want to take the plunge.

subscribe now