Apple (AAPL): Prepping for Explosive Move - Traders Get Long Volatility into Developers Conf.

Apple (AAPL) traded a large spread on the PHLX May 12th that I am trying to drill down on, between 3:15 and 3:25pm. All in all it appears that at 3:17pm a trader bought 4,000 May $350/$355 call spreads at $1.29 and 4,000 May $335/$330 put spreads at $0.36. After that the trader looked to June and bought 4,000 June $370/$375 call spreads at $0.60 and 4,000 June $335/$330 put spreads at $1.20. I am going to operate under the assumption the trader is closing a May short Iron Condor that worked nicely, and now going long a June Iron Condor.

Apple has been in a tight range and is due to breakout or breakdown, which is what these trades are looking for, and comes after Goldman recommended earlier this week to be long Apple volatility into the June 6th Developers Conference where the Company is expected to discuss its cloud initiative. The event averages a 5.4% move in shares and Implied Volatility is at all-time lows. Goldman recommended the June $350 straddles at $19.40.

Apple Bollinger Bands are not really squeezed too tight, but shares have traded in the $340 to $355 range for 3 weeks. Shares are basically consolidating along the trend line that it broke out past, and that was a descending triangle breakout with a measured move to around $385, all time highs. If shares were to breakdown below $340 there is not much support and another test of $325 would be likely, and I doubt it would hold again, so the 200 day EMA at $315 would be a downside target. The last time Apple's ATR Wilder was this low was in February, where shares topped, and made an explosive move lower. This is not to say that the next move for Apple is lower, but more a sign that an explosive move is nearing. Either way, the $19.50 straddle seems like a smart play, but let's take a look at today's trade. The trader paid $1.80 for the June Condor and a potential return of $5, $3.20 in profits, or nearly 180% gains, if shares were to close June expiration either above $375 or below $330.




I also like to look at valuation and Analyst estimates to get a feel for the range shares of a certain stock can trade. OpCo recently started shares Outperform with a $450 target, Argus raised its target to $415, ISI group raised its target to $425, Wedbush raised its target to $445, Citi raised its target to $435, UBS raised its target to $495, Jefferies raised its target to $500, Goldman raised its target to $470, and Barclay's raised its target to $465. Basically, it's a safe assumption that Apple shares can easily trade North of $400. As for the downside potential I do not see any way shares can trade less than 10X forward earnings, so $285 is the maximum downside.

In my view, Apple has greater upside than it does downside, so a bullish strategy, the risk reversal trade, would involve selling the June $315 puts and buying the June $365 calls for a $0.25 Net Credit.

Your worst case scenario is that Apple shares fall and you are put shares at a $314.75 cost basis, which is much better than just buying shares now and hoping for the best, and is why option strategies are almost always better than being long stock.