Was Strangling Apple (AAPL) A Good Idea?

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July 25, 2007 | SIN Picks | | Author Asif

Apple (AAPL) beat analyst estimates by not one or two cents, but by a full twenty cents when it reported earnings that grew 73% this evening. The company reported earnings of $818 million on revenue of $5.41 billion, which grew 24% when compared to the same quarter last year. While iPod sales grew 21%, the number that caught everyone’s eye was the 33% growth in Macintosh computers. There has been a lot of speculation in the past that iPod sales would eventually help Apple improve sales of its computers but it is ironic that this is happening at a time when the company has dropped ”computer” from its name and is now known just as “Apple Inc” instead of “Apple Computer”.

Apple sold 270,000 of its new iPhone device in the last two days of June, which happens to be a much higher number than the 146,000 activations reported by AT&T (T) yesterday. This may have to do with the fact that activations of iPhones are not done at an AT&T store but from an iTunes account at home. The iPhone that I bought as a gift last week was not activated until a day later. If investors are not impressed by the sale of over quarter million iPhones in just two days, I have no idea what would impress them. Apple plans to sell about 1 million iPhones in this quarter and about 10 million in 2008. It would be interesting to see if Apple can achieve this number given the price of the phone, the two year contract required and the exclusive deal with AT&T.

After jumping all over the map, the stock closed up $12.92 or 9.4% to $150.18 in after hours trading. If the stock posts a similar jump in the regular trading session on July 26th, the trade I mentioned in my blog entry titled Getting Ready To Strangle Apple would be very profitable. The call options should more than double in value while the puts would drop a lot but still retain some time value as expiration is more than three weeks away. I have seen stocks react to an event in a certain way during after hours trading and in a totally different manner in the following regular trading session.

Based on the reaction tomorrow, I will post an update to this blog post about my plan of action. Since the market has generally been weak, I will most likely sell the calls and the puts to complete the trade. Another alternative would be to sell an equal number of puts and calls (3 of each from the model portfolio), while retaining the extra call in hopes of further gains over the next three weeks.

Update 7/26/2007:  It appears that Apple did jump in the regular trading session as well but not as much as in after hours trading. The stock is trading up roughly $10 or over 7% as I write this update. The rally in Apple shares has been somewhat subdued by yet another drop in the market with the Dow Jones down more than 200 points thanks to disappointing new home sales and tightnening credit. The strangle we used is only slightly profitable at this point but the overall trade is up around 18% thanks to the extra call we purchased. I am going to sell both the puts and the calls and complete the trade by using the closing price at the end of trading today.

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  1. swaahaa
    August 17th, 2007

    I’ve been frequent reader of this website and quite impressed by the model portfolio record. I’m sure your personal investments are doing equally well or better.

    could you recommend some investment books you’ve liked. thanks.

  2. Asif
    August 17th, 2007

    Thanks Swaahaa. Most of the investment books (and some others) are listed on the resources page of SINLetter.

    For additional information about reading options, check out the last comment in the following blog entry where I answered a similar question.

    Throwing In The Towel On Ford

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