Goldman Sachs is out with two interesting reports ahead of Apple Inc. (NASDAQ:AAPL) earnings. Apple is scheduled to report fiscal fourth quarter results on Thursday, October 25 after the market close. They recommend investors buy some options to benefit from what Goldman thinks will be a volatile period for the stock, and what they call ‘nail-bitter’ earnings. One of the recommendations, is to buy buy November $610 straddles, as discussed further below: They note that calling stock direction on the quarter is exceptionally difficult when management commentary is so much more critical than reported numbers. Goldman Sachs see management comments on iPhone 5 supply ramp and 4Q guidance as much more critical for shares than earnings this quarter.
Goldman thinks that the potential iPad-mini launch this Tuesday could also drive high volatility as it is less hyped than the recent iPhone 5 launch, leading to greater potential to surprise investors.
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Goldman also notes that October earnings reports tend to be the most volatile report of the year for tech stocks as (a) color ahead of 4Q holiday sales is critical for annual earnings, (b) it’s the last major stock specific catalyst of the year, adding to the nervousness of investors with December ending performance reporting.
Goldman Sachs recommends that investors therefore, buy November $610 straddles to benefit from volatility, up or down. They see November options as attractive given the unusually high potential for volatility on earnings and the iPad-mini launch. Goldman recommend holders of the stock buy November $610 straddles for $57.70 (9.5%). AAPL shares sit in the middle of the 20% range it traded in over the past three months and they estimate straddle buyers would profit if shares moved 5% in either direction over the next week (assuming typical implied vol decline post earnings). Straddle buyers risk losing the premium paid.
Goldman recommends that investors close short January strangles at gain; look to re-establish post-report. They continue to believe Apple Inc. (NASDAQ:AAPL) long-term options (6 months+) are too expensive. AAPL 6 month implied vol is 36% vs two-year realized volatility of 26%.
Given Apple Inc. (NASDAQ:AAPL)’s large market cap, strong fundamental position, and lack of financial leverage, we believe AAPL volatility should be decreasing rather than increasing. They recommended selling Apple Inc. (NASDAQ:AAPL) Jan-2013 $525/$685 strangles for $40 on July 25 with shares at $574.97. Goldman recommends closing this trade at a gain (strangle price dropped to $30.20, shares at $609.84) ahead of earnings and will be looking for opportunities to re-initiate the trade following the earnings event.
In another note out today, Goldman re-iterates its buy on Apple Inc. (NASDAQ:AAPL) shares with a price target of $810. Goldman bases the price target of $810 on a 14X multiple on their Calendar Year 2013 EPS estimate of $57.74. They believe the stock will regain its momentum into year-end, and Apple Inc. (NASDAQ:AAPL) remains their top pick in the sector. Nevertheless, this quarter could be a bit of a nail biter as they expect the near-term stock reaction to be heavily dependent on end-of-quarter iPhone 5 supply, management commentary on the supply ramp, and how cautious Apple Inc. (NASDAQ:AAPL) chooses to be with guidance.
All of these factors are likely to be wrapped in the typical conservatism of Apple Inc. (NASDAQ:AAPL)’s management team, but they believe this is largely countered by what we view to be a material degradation in investor sentiment over the past several weeks (Apple’s shares are down 13.5% from the intra day high reached on September 21, 2012). We will report more on Goldman’s forecast and their prediction of 25 million iPhones sold this quarter, shortly.
Disclosure: no position in any securities mentioned