Stutland: Options Traders Take a Bite of Apple
Apple is currently trading at trailing 12-month P/E of 13, or 7.6x ex-cash. With valuation numbers like these, anyone selling Apple is basically saying that growth will be negative for the next couple of years.
Could this happen? Sure. But despite all the pricing pressure that will be felt due to competitors such as the Surface, the Fire, Android, etc., I think we are still at the beginning of a global cyclical move into tablet computing. On the other hand, I do have to say that given the world's addiction to Microsoft Office , it seems likely that five years from now, most people will hop back off the Apple OS and back to the Windows base. And it is that mentality that has caused investors to sell at will on Apple.
All of this selling has created an opportunity. I think that right now, you have to look at the fundamental picture and see that Apple is just too cheap. And some option traders agree. Volume in Apple on Friday was massive for a $500 stock, and the reversal was a rip-your-head-off rally from the lows around $505. At this point, option traders not wanting to buy the stock are taking shots on upside calls, thus finding a way to get long while defining their risk exposure.
(Read More: 'Insanely Insane' Apple Selloff Hitting Bottom: Pro)
Let's zoom in on one trade in particular. One trader bought 784 February 2013 625-strike calls for $14.97 each. This trade makes money if the stock trades above $639.97 by February expiration, which would be a 14.5% increase in value.
Because you have two things working against you when you make a trade like this – time and the need for big upside price improvement – traders will typically only make such bets when they feel really good about the stock in the short term. Thus, in my experience, when we see trades like this one, it is typically a bullish indicator for the stock.
Personally, I was hoping to see the broad market strengthen and get above $1389 in the S&P 500 December future before I jumped into Apple, since it trades in such high correlation to the broad market. But I think at that time, I will be absolutely dipping into buying Apple, and watching for the same $640 price target that this trader seems to be looking out for.
Brian Stutland is the President of Stutland Equities and a contributor to CNBC's "Options Action."
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