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Earnings Play of the Day TXN 10.22.2012

TXN has an earnings report due out after the close today. Analysts are expecting mediocre returns as net income is expected to fall 24% from $711 million to $541.3. Revenue is expected to fall 2% to $3.39 billion. Texas Instrument chips, which were used in old iPads, will likely be replaced as Apple will design and manufacture their own in Taiwan. 

My Trade: Sell the OctWeekly 28-29 Call Spread for $0.50

Risk: $50 per one lot

Reward: $50 per one lot

Break even: $28.50

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AAPL and iPad Mini Update (AAPL, QQQ) 10.22.2012

The tech giant has been on a slide as of late, more specifically since hitting $700. Shares are off nearly $100 from the all time high. It can be hard not to get emotional considering the massive amount of money the average individual investor has allocated to AAPL.

            According to a recent study done by SigFig, “Nearly 17% of all individual investors own Apple shares.” And according to the same data, AAPL has three times the level of ownership of another widely held stock, GOOG. Interestingly enough, of the AAPL investors’ sample set, they on average have 17% of their portfolio allocated to AAPL. This is confirmed with other data, nearly 60% of the float is owned by investment managers and the top 50 investors in AAPL actually own about 43% of the company. To that point, nearly 15% of the AAPL float is allocated to index funds. And finally, the largest shareholder is Fidelity Management according to recent data. This is all very important, for it is vital to know the nature of the selling and buying done everyday, along with the corresponding personality of investors.

           The AAPL analyst community already has high expectations for the device; for example Piper Jaffray expects AAPL to capture 50% of the 7in market upon release. On the other side of the analyst community, KGI Securities analysts Ming-Chi Kuo expects the cost breakdown to be around $195 for the 16 GB wi-fi version and at the higher end up to $254.50 for the 64GB, LTE + Wi-Fi edition, then perhaps one can add into that figure the typical 40% AAPL margins they so thoroughly enjoy.

            The market leading iPad 3 is 9.7 inches; some analysts and AAPL followers are expecting a 7.85 inch liquid crystal display (LCD). These dimensions are slightly different than the prevailing 7-inch norm. The heaviest competition is expected to come from the ANZN Kindle Fire and the GOOG Nexus 7; both of which have fresh models out on the market already. The new 7” Kindle Fire is priced at $159.00. At this price point AMZN is expected to just break even considering the cost breakdown, but everything after that, including items like books and movies, is what AMZN is really in the tablet business for. AAPL is expected to naturally price at the higher end of the market.

            AAPL is currently pinned between the 100 and 150 day moving average. The average price target is about $789 and for the upcoming earnings on Thursday the current quarter’s estimate is about $8.92. Of the 39 analysts who cover the stock, 97% of them rate Apple either a “strong buy” or “buy.”

Feel free to e-mail any comments, feedback, suggestions, or general inquiries to…

Author

mark@keeneonthemarket.com

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Low VIX Strategy & Skew Play (VIX, VXX, VXN, SPY) 10.19.2012

From the prospective of an options trader, one should know the basic categories of being a net premium seller vs a net premium buyer. Each category clearly has is pros and cons, but it more or less could debatably come down to one’s volatility forecast. It is popular, for example, to fade the implied volatility pump pre-earnings; for uncertainty rules around catalysts. Then as the event comes and goes implied volatility collapses and traders cover their short premium. The former is very dependent on a good risk reward ratio, forecasted IV crush, and underlying asset…but it is all based around volatility.

The five-year (#Fibonacci) average of the VIX (252 trading days in a year x 5= 1260) over 1260 periods is around $26.00. This is roughly 60% from current levels, but it is important to remember that when the VIX decides to move, it really moves. The last time we were at a $26 VIX was in June 2012.

Large trades in the VIX seem to confirm this upside potential. Big players were trading the upside call skew in November, more specifically, the NOV 23/28 1×2 call spread. This is taking advantage of the upside bid in the VIX calls, for this trade takes in a small credit by selling the short strike of a long call spread 2x. It profits big in-between the strikes, but profits start to trail off after 28, should the VIX really explode by NOV VIX expiration.

Equity option strategies that would most likely profit from this kind of VIX scenario include the loved & hated gamma scalp. While Greeks are obviously important here, the concept is really simple. Long straddles fluctuate, benefiting from volatility, then as one side of the straddle profits, traders sell or buy stock to neutralize their deltas as the straddle becomes delta bias toward the winning side. As the stock moves up and down, small profits are made via scalps; offsetting time decay. The challenging part of this strategy is when to neutralize said delta along with scanning for a good underlying. Scanning for a stock with not too much IV, but with just enough bang is what most find challenging, for if volatility or the stock does not move, this strategy is crushed.

Feel free to e-mail any comments, feedback, suggestions, or general inquiries to…

Author

mark@keeneonthemarket.com

MarkVIX