$AAPL is acting irrationally compared to almost all other equities

I listened to Fast Money yesterday and there was yet another talking head, whose primary expert qualification was that she called the Enron debacle (BACK IN 2000!). She was implying, without out-right saying, that the target price should be $200 based on her analysis. Her main premise is that transitions from a ‘growth tech stock’ to a value tech stock’ is a messy affair. To the credit of Karen Finerman, she buttoned up the conversation by saying that AAPL has never been valued as a growth stock. Finerman is correct, of course, and a valuation now that is bordering on single digits is certainly not a growth stock valuation. Nevermind that the PEG ratio is closing in on 0.5.

Here’s my rant on this stock: depending on whether or not AAPL is rising or falling analysts and talking heads will proffer the argument that AAPL is either just like other companies or that AAPL is special and different than other companies. That’s ok, but the bottom line is that it can’t be both! This is a binary type of distinction, like being pregnant or not.

Either way, no matter what your answer is,  the stock price is behaving irrationally. Lets take one side and say that AAPL is just like other companies. Lets compare it to two older tech stocks, MSFT and CSCO. I’ve chosen these two as AAPL is actually a blend of the two. CSCO primarily makes hardware that changes substantially with time (why I chose CSCO over INTC whose product is fast becoming a commodity) and MSFT primarly makes software with a few exceptions. Now let’s compare the P/E ratio using 12 month trailing earnings and PEG ratio using 5 year projections. Right now for P/E AAPL is trading at 10.37, CSCO at 13.67 and MSFT at 14.94. Their PEG ratios (which compares valuation to growth rate) are as follows: AAPL 0.75, CSCO 1.63, MSFT 1.83. Here’s the irrationality in this scenario – the PEG ratios are assuming that AAPL will not grow at all, anymore. In fact it assumes that it will contract, much like RIMM. But lets say that AAPL is like these old tech stalwarts and should trade with a similar P/E. Then if valued like CSCO, AAPL should be trading at 601.48, and if trading like MSFT then we should be seeing a share price of 657.36. But today, AAPL is trading at 456 instead.

What’s the other side of the argument? That AAPL is special, that its not like other companies, it is innovative and forward thinking, like say NFLX? Here the market is even more irrational. NFLX is trading at a PE of 636 and has a PEG of 33.91! Want to see what the company would be worth at this type of valuation? $27,984 a share! Yes, one share!

Well the answer to the question is obvious, the market is irrational. Therefore trading is a little like trying to predict what a crazy-assed schizophrenic will do at any given situation. I think I already knew that, but until you look at the numbers you don’t realize just how crazy it can be . . .

Is today the day that $AAPL starts the climb out of the pit?

I sleep pretty well and rarely worry about the performance of our portfolio. But I have had about 2-3 nights over the last month where I woke up early worrying about my AAPL position. This morning was one of those mornings. I don’t know why but maybe it was because the price action yesterday was so disappointing. The stock made it to about 455 or so but ended closing down around 442. When it hit the 440’s I sold a couple of bull credit put spreads that expires next week, the 440/425. Mind you I am long an April 440/425 bear put spread as a hedge, but it was still disconcerting to see the stock trade so poorly. I woke up this morning convinced that this was the start of the march down to 420 before going on down to the 300s.

The stock opened around 445 and then went back down to 442, but since then has started a 45 degree climb, slow but steady and as I write this it is trading about 459, up 16.8 or about 3.8%. I am long both the stock and spreads but have been reluctant to sell upside calls thinking that there would come a day that valuation would matter. Maybe today is that day.

Also today:

AMZN – bought a March 250 call to protect the Feb 265 and Mar 280 calls that I am short. Still own an Apr 275/255 put spread to hedge this long. I still don’t trust this stock and think when the market pull back occurs. It takes AMZN down farther than most.

Yesterday:

GOOG – bought a calendar spread, BTO Mar16 750 call and STO a Feb22 780 call

IBM – added a calendar spread BTO April 180 call and STO Feb16 205 call

TBT – added to long positions both underlying and; BTO Mar 68 call STO Mar 72 calls

Nervously trading AMZN. Getting a bit longer AAPL, but hedging with VXX

Greetings All.

One of my New Year resolutions is to trade less, a LOT less. But I have failed miserably thus far even going so far as to trade 33X yesterday. OK, I know Fidelity (my platform) thinks this is just great, but I think I trade much worse for it. So I am writing them down, and limiting them to just 10/day or 50/week. We’ll see how that goes.

Today I have taken off my last long call in AMZN, the Feb16 200 and made a good bit on it. However, I did not take off the Feb16 265 call that I am short. I got $10 for it when I sold it and now it is trading about $15. I’m nervous that AMZN could spike after earnings so I spent about $5 on a Feb16 280/300 bull call spread as a bit of insurance. This required 3 trades. I still own a Feb16 240 put and a Apr 275/255 bear put spread. If AMZN tanks after earnings, I’ll do pretty well. If it cranks up, well, then not so much.

I broke another rule today. I bought some long AAPL calls. I put on a couple of calendar spreads BTO the March 450 calls and STO the Feb8 465 calls for about $14.6/each. I am short a 450 call for this week and next and this helps provide a bit of protection if AAPL starts to take off, which I think it could. All it will take is some sort of announcement. Today’s move may just be announcement of a higher storage iPad. This is setting up for some new enterprise announcement. Health care?

Finally, bought a bit of insurance. Did a buy/write on VXX buying the underlying for about $23 and selling the Feb16 25 call for $0.50. This is a really low level in volatility that just can’t be sustained.

AMZN Earnings, What to do, Mr Grasso?

So I watch CNBC, probably too much. but I do like to catch Fast Money both at the noon hour and after the market closes. I like it because of the diversity of traders that appear, some I trust and some I don’t.

I like Steve Grasso. I particularly like his predictions in the S&P Cash Futures and his lines of resistance and support. One of the names he has been touting for at least the last few months is AMZN. I think I remember him saying it was one of his favorites. So I was a little shocked to hear him say today that for the whole time he has recommended it, he has never bought a share of the stock. Can’t get too pissed at him about that, the stock is at all time highs and he hasn’t profited a nickle. But I have, I had three calendar bull call spreads on using the February and April 200 calls as my stock replacement.

Today Grasso said he thinks the stock will pull back after earnings tomorrow, and I believe him. I took off three of those spreads today and left one on. I bought an April 775-750 bear put spread to protect the profits in that one. But I may just pull the trigger and close that one out tomorrow as well. We shall see. My other choice is to sell the call and make about a kilobuck on it and let ride the Feb16 265 call that I sold for about a kilobuck and is now trading at about $1.6K. If I do that I may buy a 280 call for a little insurance, but really the conservative move is to just close it out and see if I make a few $$ with my put spread. Hell I even sold the 10 measly shares of the underlying I had in the name, that I had kept mostly to just have the price on my screen.

Could be wrong here, but it never hurts to book a profit . . . .

PCLN pulled back a bit today. It was an excellent opportunity to square things up a bit. Most of my call spreads are now pretty deep in the money but was able to structure things so that I have about three of them with all of the short call positions being around 710 or so with lots of implied volatility that should dissipate as we get close to Feb 16 expiration.

GOOG is still my favorite name at the moment. Acting really well and earnings are in the rear view mirror.

CRM jumped up today on the news that there is a 4/1 stock split coming. Did you see that Mr AAPL? Did you see what CRM did, just with that mathematical accounting trick?

At least APPL did stabilize today. Carter Worth on Fast Money seems to feel pretty comfortable with it getting back to 500. His rec: short the S&P and go long AAPL. Truthfully, that’s my plan, at least to a certain extent. Bought 5 bear put spreads in the SPY today, the Mar 145/140, for about .65 each. Pretty cheap insurance, if you ask me . . .

Sunday Evening Dec 9 2012 Why is $AAPL performing so poorly?

Like many people, I am invested heavily in AAPL common stock and options, both puts and calls. As the stock has risen my theoretical return on the year has increased, but here as it declines over 20% from its high of over 700, my portfolio has gotten considerably less valuable. Why is this happening to such a stock with incredible fundamentals?

I think the answer is two fold, and relatively simple. First margin requirements were raised last week by at least one clearinghouse, and I am sure many who hold this stock on margin don’t want to pony up the increased margin, so they liquidated shares.

Secondly, I think AAPL is also suffering from both tax loss selling AND tax gain selling. The tax loss selling is pretty straightforward, there are some that bought higher than here, significantly higher, like the high 600’s. Perhaps they have gains for the year in other holdings and want to offset some by taking some losses. This is an old technique and basically follows the idea that tax deferred is tax saved.

But this year is REALLY different, many people are selling to book gains as income tax rates will almost certainly be going up for those making over $200-250K/year which includes a lot of traders. Even if tax rates don’t increase and the politicians vote to ‘kick the can down the road’ there is a significant tax increase built in to start Jan 1. This increase is part of the Affordable Care Act (ACA, or as many call it Obamacare). For wages, the amount withheld for Medicare will go up 0.9% from the 1.45% currently paid by individuals, for wages above $250K if married, $200K for singles.

There will also be a tax on unearned income, such as capital gains, dividends and interest and this new tax is called an unearned income Medicare contribution and this tax again applies to those with incomes noted above. This tax is 3.8% of the unearned income.

No one wants to pay more tax than less, so companies have begun special dividends this year to try to distribute the $$ before the new taxes kick in. Those traders and investors may be deciding to take their gains in AAPL this year rather than next year for these taxes alone, never-mind what happens if we go over the fiscal cliff.

I think this selling will come to an end sometime in the next week or so and then downward pressure will be relieved. Right now AAPL is selling for about a 12 PE, the lowest in 10 years and has a PE of about 7-8 when you back out the cash they have.

When the buying starts and the greed sets in, the move up could be violent and surprising. Stocks move higher and lower than people expect and AAPL could test a new high, even before the end of the year.

Thursday November 29 2012 Climbing and Stumbling the Fiscal Cliff

Yesterday, I think it was, one of the traders on Fast Money said that the way to time the markets was to find out when Harry Reid was going to speak, and then go short. Then find out when John Boehner was speaking and go long.

That correlation held for about . . . . let’s see . . . .24 hours or so. I was sitting at the computer today when Boehner walked out and started speaking at 11:40. I know what time he came out b/c I looked at the chart and saw the drop in the SPY with the spike in volume.Boehner was definitely much more of a Debbie Downer today than the last time. In fact the markets sold in his first sentence.

So you tell me, is this a skittish market or what? I mean, really . . . . ?

But as it turns out it was a good opportunity to get a bit longer, which I did in PCLN and AMZN. I tend to buy deep in the money spreads that are out a few months and then sell short dated bear credit spreads against them. The move up in PCLN caught me a bit flat footed and was happy to see it pull back to 660 to square things up a bit. I am now short a 660 call expiring tomorrow and a 675 and 680 call expiring next week against my January 600/700 spreads. If it pulls back more I may buy a next week 670 call.

The market did come back, but this time after Harry Reid started speaking. He was no less stern than Boehner but I suppose the market is used to him being a Debbie Downer, so the event was discounted.

AAPL, I think, is consolidating still and may very well have some upside to it after all. David Pogue had a review of the tablets in the NYTimes today and says the iPad Mini is the best. Having just gotten one myself, I can see why they are going to be the gift this Christmas. Like the iPhone 5 the only thing that will limit them is the ability to make them.

Must be great to be a company where the limitations as to what you sell is how fast you can make your product.

You can read David Pogue’s article here: http://nyti.ms/TlUhPD

 

Wednesday Morning 11/28/2012 AAPL Weekly Options

Pre-market indicators were down this morning and the equity markets did, indeed, open lower. I took advantage of the pullback in AAPL to square up a few weekly positions.

Speaking of weekly options . . . .

Something interesting happened the week before Thanksgiving and that was weekly options in AAPL all the way until the traditional monthly December expiration became available to trade all at once. If you trade these weekly options you know that the following weekly options that expire on Friday become available to trade on Thursday morning eight days before, but this time on, Nov 15th, the options expiring on Nov 23, Nov 30, Dec 7, and Dec 14 all appeared.

Normally I make sure that I am present at the market open on Thursdays as I trade weeklies not only in AAPL but also in AMZN, GOOG, MA, PCLN as well as the SPY and the SSO. I trade these options because the underlying equities trade at high volumes and are therefore liquid, but also (with the exception of the SSO) all have a share price over 100. In fact AAPL, GOOG, MA and PCLN all trade over $400/share. This makes the options much more interesting and valuable. On Thursdays I usually roll my short option positions from one week to the next as the premium almost always has come out by Thursday before expiration.

But on that Thursday, I had to decide about putting on some positions for the whole month and the amount of open positions I held swelled. Not a position I like to be in . . .

The only other equity that I trade in on a regular basis that seems to be offering these ‘new’ weekly options is the SPY. However, after I did a bit of research it looks like the CBOE amended a rule to allow up to five weeks of weekly options to be open at any given time and I have seen that now the Dec28 options are available for AAPL

So much for making my trading, and my life, simpler. I guess I will need to step up some self imposed rules and rely less on the market makers to keep me in check . . .

Tuesday Morning Nov 27 2012

The market opens down a bit this morning but seems to have firmed a bit as we approach halftime. I have 31 open positions in AAPL this morning as I write this. I think I had about 6 more this morning but I spent some time closing out deep in the money call spreads and out of the money puts and put spreads that I was net short, that is bull credit put spreads.

I opened a new bull put credit spread, the Dec22 600/570 spread for which I received about $15. However I came into the morning already short a Dec22 580 put at about $25 so this creates a bit of a put fly.

I also opened a new bull call spread, the Feb2013 600/700 which cost me $24.35. Seems pretty safe that AAPL should close above 624.35 after Q1 earnings

GOOG opened down below 660 but looks to rebounding above 668 now. I am long the equity itself but also long a Jan2013 600/720 call spread and a Dec22 680/690 call spread. Against this I am short a couple of this weeks 680 calls at 2.25 each. I am considering rolling these short calls into a Dec22 700 short call and then Thursday will look to sell another weekly call expiring on Dec7.

 

Trading is an Emotional Experience

Every endeavor in life takes practice. I have practiced both medicine and law and I have come to believe that there is no such thing as a ‘natural’ in anything. Anyone who masters their craft, whether it is a profession, a fine art or an athletic skill, has put in a significant amount of time getting there. Malcom Gladwell, in ‘Outliers’ says it takes about 10,000 hours to get good at something. Trading is no exception. Some of my former colleagues think that all one has to do to trade is read a few books, paper trade a bit and voila, thousands can be made in a day.

But if you trade with any regularity, you know this isn’t true. It takes a while. And the reason it takes a while is because trading is incredibly emotional. The score is kept in dollars and it is hard to hide and fudge the results. It stares at you on computer screens and mocks your intelligence at every chance.

I don’t agree with those that say that hedge fund managers and institutional traders manipulate the market to the disadvantage of the retail trader. The big advantage, besides their size, is that they are trading with someone else’s money and they can weather emotional storms much better.

I think that if we get better at trading, it is because we know that sometimes stocks go down, way down (like AAPL!) but they come back eventually, especially if the fundamentals are so strong. But when AAPL is trading at 506, it feels hopeless and you can never imagine that within a week it could be closing in on 600 again. If you can keep from panicking and throwing in the towel at levels like that you can be positioned for the comeback. I’m not gonna tell you that I closed out all my short calls when AAPL was 506, because I didn’t. I actually sold a couple of 525/530 weekly credit bear call spreads down there, but I did close them out when it passed 520.

The only way to get to this point though, is to suffer a few losses, only to see the equity bounce back. That’s why I don’t think paper trading works, because it doesn’t count. Losses don’t hurt and gains don’t feel good.

The only way to get there is to do it, and do it, and do it.