Hey There Income Hunter,

Friday’s pre-market headlines went something like this …

Apple (Ticker: AAPL), Alphabet (Ticker: GOOGL) and Amazon (Ticker: AMZN) Report Disappointing Earnings

And they were very disappointing, with all shares down around 4% post-earnings.

Next we got a black swan (three standard deviation move) payrolls report, with payrolls rising 517,000k versus 188,000. Normally, I would have thought it would be even worse for the market.

But no!

By noon, AAPL was +4%, GOOGL was down just 1% and AMZN, well, it was still down 4%.

AAPL was the outlier and, as usual in this market, valuation doesn’t seem to matter.

But I had to fade that incredible AAPL move.

Here’s why.

Let’s Run Through AAPL Results

• • • iPhone: -8% YoY
    • Mac: -29% YoY
    • Ipad: +30% YoY
    • Wearables, Home & Accessories: -8% YoY
    • Services: +6% YoY

Thank goodness for the iPad or it would have been a clean sweep for hardware.

Now, there were three factors that were responsible for the drop-off ..

1. 1. 1. The first was the foreign exchange headwinds, which is the stronger dollar making the cost for foreign buyers more prohibitive.
      2. Covid-related due to the China lockdowns, which impacted the supply of the iPhone 14.
      3. The challenging macroeconomic environment, inflation and the war in Eastern Europe.

 

All are legitimate reasons for sliding earnings, but here is the issue with the stock price … 

AAPL had its worst quarterly/yearly earnings in 2016 when it had a P/E of 10.  

Today’s P/E of 25, I would say, is massively overvalued … 

To get back to an average P/E of 11 over the 2010-2016 period, you are looking at a 40-50% decline in price.

In a world of constant money printing and a perfect performance, maybe AAPL could hold the P/E around 25 …

But in a world of continued supply restraints, less global trade and continued quantitative tightening, no way.

AAPL Option Flow Shifted
So, I watched as AAPL tested $157 while the largest positive gamma strike was sitting just below at $155.

The largest positive gamma strike acts as a critical resistance area for the stock as. Investors’ long calls sell as the strike is reached and option dealers buy the calls and sell stock to delta hedge the long call position. 

So, I waited to see the option flow once the level was breached and, sure enough, put buying and call selling came in … here is a snapshot of the SpotGamma real-time option flow:

Notice how call and put buying flows dominated from the start of trading. Then around 10:30 the call buying switched to call selling, both measured in terms of delta in dollars. You can see on the scale to the right both calls and put flows show negative deltas. 

The net impact on the stock was negative, so that gave me the signal to sell a call spread above the market. 

I sold the 167.5/162.5 Feb17 call spread at $.82 with the stock trading at $156. By doing a call spread I limit my margin to the $5 spread. 

The probability of success is decent and the income would be used to fund a debit spread. 

I would cut the trade to a 30-50% loss on the credit. 

Live and Trade With Passion My Friend,

Griff