Apple (AAPL, $88.90, down $1.22) is trending lower this morning after a price target cut on its shares. Credit Suisse reduced their target for Apple to $120 from $135 as it sees weakening demand for the PC market. They maintained an “Outperform” rating on the stock.
I’m a huge Apple fan but I play the stock both ways. When Apple was making new all-time highs, we were going long by buying call options. When Apple begun to break down, we purchased put options. Over the past few months Apple has been stuck in a mini-trading range of $90-$100 with an occasional run to $110.
Where the stock goes from here depends on a few variables. To start, if PC demand is falling, Apple may have to cut prices to move Macs. That may help sales but their gross margins would take a hit. I’m sure iPod and iPhone sales are going to be “OK” but I don’t think they will be as robust as past quarters.
Wall Street is preparing for a weak holiday sales season, and Apple could suffer if that’s the case. The other factor to the equation is that Apple has no plans to release any new products for the biggest shopping season of the year which could weigh on the stock.
I don’t like betting against Apple but the stock has fallen below its 20, 50, and 100-day moving averages and could test its 52-week low of $85.00. Short-term traders are targeting the November 85 puts (QAAWQ, $3.15, up $0.35) and the November 80 puts (QAAWP, $1.73, up $0.17) which expire next Friday.
I feel safer playing the December 80 puts (QAAXP, $5.10, up $0.20) because it gives us more time for a breakdown but the November puts will give you more bang for your buck. Remember though, the November puts are like a double-edge sword. If Apple bounces back and reverses course, you could lose a significant amount of capital.
If you use the December puts, place a 25% stop loss from your entry price and target a 50% return or better. If you are doing the November puts, do a 50% stop loss on your entry and target 50%-100% gains.