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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
RIMM Shares Rattled After Missing Revenue, Lowering Guidance
Friday, June 17th, 2011
8:30am (EST)
We did our Research and we tried to get Wall Street In Motion…
The market went on another wild ride on Thursday as the bulls and bears battled to a draw after the major indexes finished mixed.
The Dow gained 64 points to finish at 11,961 after trading to a high of 11,990. The S&P 500 added 2 points and closed at 1,267 after kissing a high of 1,275. We mentioned resistance yesterday at 12,000 and 1,300, respectively, so those levels will need to be penetrated and held today for the bulls to feel good about the weekend. If not, Monday could a key day for the market.
The Nasdaq, however, finished lower by 8 points to settle at 2,623. The index spent much of the morning session in positive territory and traded up to 2,642 before fading. We have outlined resistance at 2,650 all week and the bulls will at least need to hold 2,600 or next week could get nasty.
We took the drop in Tech as a sign that Research In Motion (RIMM, $35.33, up $0.16) was going to report a lousy quarter although we had already predicted they would. When shares were halted after the bell, we felt good, but still nervous. However, because we recommended closing half of the trade when it was up 80% on Wednesday we knew the worse-case scenario was a small loss and the best-case outcome would be if shares continued to tank.
On May 9, 2011 – RIMM was just above $45 and our weekend chart work was showing a drop from $45 to $40 which is where we said $38 would come into play. Once penetrated, we said a drop to the lows $30’s could be in the cards. Here were our exact comments and a dummied-down chart from that Monday morning before we recommended put options the very next day:
“Thoughts: (RIMM, $45.99, down $1.30) – Shares made a major break below long-term support on Friday (purple circle). The second wave of support is in the $38 area (green line, yellow circles) which gets the July puts to a least a double. However, there is virtually no support until the low $30’s if the $38 level fails (red line). Here is an updated chart:
(END)”
Well, we rolled out the red carpet, or should we say red line, for the company and they were right on cue.
RIMM beat estimates by a penny which was not surprising given how low the bar was, but, we have been saying they would lower guidance and they missed on their revenue numbers. RIMM reported a profit of $1.33 versus $1.32 but revenue came in at $4.91 billion against a forecast for $5.15 billion. They lowered their current quarterly and yearly earnings outlook.
Shares traded below $30 last night and finished at $30.26, down $5.07, and are at $29.25, down $6.08, in pre-market action this morning.
We have been telling our subscribers this horse was dead and it was not getting back up. After checking the charts and banking 60% on our first RIMM trade, we went back to the well for more. Our current put option trade should hit a triple-digit return today.
We will be back at midday with our next update but look for a Trade Alert AND a possible NEW TRADE before then if we see something we like or we take profits on some of our current trades this morning. We mentioned yesterday the market is setting up for some nice pin action over the next few weeks and into July. We expect to take full advantage of the current volatility.
Futures are pointing towards a slightly higher open…Dow futures are higher by 86 points to 11,985 while the S&P futures are up 11 points to 1,275. The Nasdaq futures are advancing 15 points to 2,210.
We have a lot to cover inside our Members Area so let’s get on it. Subscribers, check for the updates.
Tags: call options, futures options, high beta stocks, Hot stocks, momentum options, Momentum stocks, NASDAQ: RIMM, option market, option tips, options, options mentoring, options trading course, Research In Motion downgrades, RIMM's earnings miss, stock market options, weekly options, what are options
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