Adam may have suffered from his bite of the apple but investors can profit from the growth of that tree.

Editor's Note:

Apple (AAPL) shares traded at $615 on Friday. Apple options are way too expensive for most traders to use for speculation. How do we solve this problem and profit from the Apple product revolution?

Instead of buying Apple directly we buy the component suppliers that make Apple products so successful. Today I am recommending Qualcomm and Broadcom. The reason I am doubling up on the Apple derivatives is the pending announcement of the iPhone 5 or whatever they are going to call it.

Jefferies Group claims they have confirmed from multiple sources that Apple will soon announce a product event on September 12th that will be the iPhone 5 introduction. Whenever Apple is heading into a major product event the stock rises along with the stock of all the component manufacturers. We want to ride that wave into the iPhone 5 announcement.

At the same time Facebook is likely to go in the opposite direction. Friday's short squeeze was just that a squeeze, not a sudden desire to own FB. Price targets are dropping almost daily and shares of FB should decline into the mid teens before the next share lockup on August 15th.

Lastly, we were stopped out on the Russell 2000 ETF put on Friday's short squeeze. I believe that squeeze will fail to attract any follow on buying and I am putting the IWM put back into play.

However, as I said in my Option Investor commentary I am on the verge of turning bullish rather than expecting a normal Aug-Oct decline. The market refuses to go down and every dip is bought. The next dip will be critical. If we see another higher low then it will be time to move into dip buying mode rather than selling the bounces.

James is on vacation this week.


Qualcomm - QCOM - close: 60.24 change: +1.36

Stop Loss: 57.75
Target(s): 64.50
Time Frame: 4-6 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
Qualcomm is riding a wave of success with the Apple iPhone products. While Apple saw sales slow in Q2 they are currently ramping up for new deliveries of the iPhone 5 in late September.

Jefferies has confirmed that Apple will hold an announcement event on Sept 12th and they believe it will be the iPhone 5.

Qualcomm executives met with representatives of Goldman Sachs last week and the results were positive. Goldman reiterated a buy rating on the stock with a price target of $71. Analyst Simona Jankowski said the meeting reaffirmed her view that QCOM is the favorite stock in the commtech group.

Qualcomm believes that the extended handset replacement cycle in mature markets like North America and Western Europe over the last two quarters (replacements declined) will likely prove temporary rather than structural, as consumers hold out for the strong Q4 line-up and carriers save their subsidy money for the Q4 launches.

QCOM reported earnings with a 28% increase in revenue but warned that the current quarter would be slower. However, they also guided estimates much higher for Q4. Research firm iSuppli, said Apple is increasing chip orders by 15% and QCOM is supplying chips for other makers as well with new devices coming out in Q4.

Apple is set to have record Q4 sales of the iPhone 5 with many new features including 4G communication.

Qualcomm also just announced a new tablet carrying their new "Pro" version of the Snapdragon S4 quad-core chip.

I believe QCOM is the way to play Apple without paying $600 a share for stock.

After Friday's short squeeze I am suggesting we try to buy QCOM on a dip to $59.50. However, if we do get a breakout over the 100-day average at $60.50 I would suggest we enter the trade.

Trigger: Enter with a QCOM trade at $59.50 or a breakout over the 100-day at $60.50.

- Suggested Positions -

Position: Buy Oct $62.50 Call (QCOM1222J62.5), currently $1.62
QCOM Chart

Entry on UNOPENED xx at $ xx.xx
Average Daily Volume = 1.5 million
Listed on Aug 4, 2012

BRCM - Broadcom - close: 34.01 change: +.56

Stop Loss: 32.50
Target(s): 38.50
Time Frame: 4-6 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
Broadcom is a supplier to Apple and like Qualcomm it should have a very strong Q4 as deliveries of iPhones and smartphones from other manufacturers make Q4 the largest quarter in history for smartphone sales.

Broadcom saw earnings decline -9.7% in Q2 as a result of slowing iPhone sales during a lull in the replacement cycle. However, gross profit margins were 52.5% which are very strong. This should mean the Q3/Q4 earnings will be strong because chips for the next cycle of phones are currently in production in order for Apple and others to deliver their phones in October, or even late September as some analysts predict.

Shares of BRCM declined to $29 after the Apple earnings miss but have rebounded strongly in the three weeks since. Shares have consolidated under $34 for the last eight days and could be about ready to breakout to higher ground. The 100, 200 and 300 day averages all converge at that mid $34 level so a breakout could be strong.

I am recommending a November $36 call because the next closest strike is September and I think that is too short. I am currently profiling a breakout entry but should we get another market decline next week I would suggest revising it to a buy the dip entry. However, BRCM did NOT decline last week with the broader market. That suggests holders are locked in for the next Apple rally.

Trigger: Enter only with a BRCM trade at $34.75

- Suggested Positions -

Position: Buy Nov $36.00 Call (BRCM1217K36), currently $2.06
BRCM Chart

Entry on UNOPENED xx at $ xx.xx
Average Daily Volume = 10 million
Earnings Oct-23rd
Listed on Aug 4, 2012


FB - Facebook - close: 21.09 change: +1.05

Stop Loss: 23.25
Target(s): 17.00
Time Frame: 2-4 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
Facebook has turned into the stock everyone loves to hate. After they reported earnings the prior week the shares had declined from $29 to less than $20 on Thursday. The market short squeeze on Friday spiked FB back to $22 but it was quickly sold to close at $21. I believe this is an opportunity to launch a new short play.

Facebook has 674 million shares outstanding as of Friday. On August 15th another 268 million shares will see their lockup expire and become available for trading. That is 40% additional shares.

If you were an investor or employee and you watched your shares decline from $35 to $20 ahead of your lockup expiration you are probably just waiting for an opportunity to sell.

Another factor is that taxes are due on the awarded shares regardless of whether they are sold. That means employees have a big tax bill and they have not been able to sell those shares to pay the taxes. That is an additional incentive to pull the trigger on at least part of their position on August 15th.

Facebook has hundreds of detractors and they seem to be racing each other trying to put a lower price target on the stock. Mark Hulbert was on CNBC on Friday with a $13.80 price target based on a bunch of different metrics.

Facebook also has the various lawsuits over the IPO including the valuation and the various claims made about users and revenue in the days leading up to the IPO. There are plenty of clouds and no real catalysts to pump up the stock.

Facebook said expenses grew by 60% in Q2 and they would grow faster in Q3/Q4. That means earnings will decline.

I am recommending a September option with plans to exit after the August 15th share expiration.

The target is a decline to $17.

Entry Trigger: FB shares must be negative to open the trade.


Buy Sept $20 PUT (FB1220U20) currently $1.60
FB Chart

Entry on Unopened XX at $ XX.XX
Average Daily Volume = 80.0 million
Listed on August 5, 2012

iShares Russell 2000 ETF - IWM - close: 78.61 change: +1.83

Stop Loss: 81.25
Target(s): 75.75
Time Frame: 2-4 weeks
New Positions: Yes, see below

ETF Description

8/4/12 Update
We were stopped out of the IWM put from last week on the monster short squeeze on Friday. The Russell failed to reach the same heights as the prior Friday squeeze but I had the stop too close going into this Friday. Who knew there would be a +250 point intraday Dow rally?

I am reinitiating the IWM put because I think the short squeeze gains are unsustainable. The Russell has the worst chart of the major indexes and has rebounded the least on a relative basis. If we don't get any bullish follow through on Monday then I think we will retest Thursday's lows.

You can read the prior play description HERE

The target is a decline to the June support at $75.

Trigger: IWM trade at $78.45


Buy Oct $78 PUT (IWM1220V78) currently $3.07
IWM Chart

Entry on Unopened XX at $ XX.XX
Average Daily Volume = 60.0 million
Listed on August 5, 2012