Apple (AAPL, $109.88, down $18.36) is down sharply this morning after a couple of analysts downgraded the stock. RBC Capital lowered Apple’s stock from “outperform” to “sector perform” while Morgan Stanley (MS, $22.41, down $2.34) shifted gears from “overweight” to “equal weight”. Morgan’s price target for the stock was also lowered from $178 to $115. RBC Capital dropped its target from $200 to $140.
It seems both analysts believe that a weaker economy will hamper the consumer which will lead to less demand for Apple’s products. Hmmm. I’m not sure demand for Apple’s products will suffer as much as its stock is today but the downgrades have hurt. Today’s whipping is the biggest drop in Apple’s stock in seven years.
I have written about Apple for quite some time as well as Research In Motion (RIMM, $66.48, down $4.28). Both stocks have been huge winners in the past and normally go through these wild price swings a few times a year. They have been leaders in the past and will be in the future but the current climate is punishing both stocks.
RIMM recently reported lousy numbers and its outlook scared Wall Street. The stock also got a downgrade this morning. Some of you may have put on an option strangle trade for RIMM based on your comments and emails and that trade has done extremely well.
The October 120 calls (RULJD, $0.03, down $0.01) were going for $1.20 the day earnings were announced and the October 80 puts (RFYVP, $14.85, up $3.50) were going for $2.06. The calls will obviously expire worthless but the puts are up seven-fold. The total cost to buy 10 calls and 10 puts would have been around $3,250. Even if the calls expire worthless, you would still have nearly $15,000 if you sold the puts today. Talk about ROI…
I don’t expect Apple to keep falling as low as RIMM but it could. The market is very irrational right now which means these types of options trades are working. If you wanted to look at Apple as a strangle trade you could follow the October 120 calls (QAAJD, $5.85, down $7.65 and the October 100 puts (QAAVT, $5.35, up $4.55). I think there will be enough movement in Apple that the trade could return 10%-20% over the next few weeks.
Rick Rouse
Rick@OptionsMentoring.com