Apple Stock Poised for Strong Growth, Options Market Signals Optimism

(Note: This analysis is crafted by a financial writer and portfolio manager.)

The ongoing debate among analysts regarding Apple Inc. (AAPL) has created a swirl of uncertainty, leaving even seasoned investors puzzled. While JP Morgan highlighted signs of iPhone sales softness on January 23, Morgan Stanley countered on January 25 by signaling limited risk of Apple missing its guidance in the upcoming earnings report.

Despite the mixed analyst opinions ahead of Apple’s February 1 earnings announcement, the options market paints a far more optimistic picture. Current option trades suggest the stock could surge roughly 17% by June, potentially reaching around $203 per share.

The technology sector started 2018 on a high note, with the SPDR Technology ETF gaining about 7%. However, Apple shares have lagged by approximately 2.3%, largely due to uncertainties surrounding the success of the latest iPhone X. Should Apple exceed expectations in its earnings release, options traders stand to benefit significantly.

Long Straddle Strategy Indicates Potential Volatility

The long straddle options strategy expiring on June 15, with a $170 strike price, implies Apple’s shares could swing approximately 13% in either direction over the next four months. This is based on the combined cost of purchasing one put and one call option, which totals around $21.40, suggesting a trading range between $149 and $192 by June.

Options Market Shows Strong Bullish Sentiment

The bullish sentiment is further evidenced by the volume of $170 call options, which nearly double the number of puts, with 14,000 calls versus 8,000 puts in open interest. The notional value also underscores this optimism, with calls representing about $16.6 million in bets compared to $7.1 million for puts.

Significant Call Option Investments at Higher Strike Prices

Investors are placing substantial wagers on Apple shares climbing further, with nearly $20 million invested in $175 calls, $9.5 million at the $180 strike, and close to $10 million on $200 calls. In contrast, put options attract considerably less interest, highlighting a prevailing bullish outlook.

Targeting a 17% Price Increase

The heavy investment in $200 strike calls suggests that Apple’s stock price would need to reach approximately $203 for these options to break even, marking an estimated 17% increase from current levels.

These sizable bets reflect the options market’s confidence in Apple’s near-term performance, potentially disregarding bearish analyst forecasts or considering any setbacks as temporary.

It’s important to note that not all call option open interest represents buyers; some may be part of covered call strategies, where shareholders sell calls to collect premiums, implying a willingness to sell shares if prices exceed strike levels.

Stay alert for Apple’s earnings release on February 1, as it could be a pivotal moment for investors and traders alike.

Michael Kramer, Founder of Mott Capital Management LLC and manager of the Thematic Growth Portfolio, typically holds stocks for three to five years. This analysis is educational and not a solicitation to buy or sell securities. Investors should consult qualified financial advisors before making investment decisions. Past performance does not guarantee future results.

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