STOCKS

Investors looking to take another bite should avoid the volatility at current resistance levels and wait for the next solid pullback, writes MoneyShow’s Jim Jubak, also of Jubak’s Picks.

What price Apple (AAPL)?

For the short term, I think the options market is a better guide than the fundamentals in Apple’s March quarter earnings report of April 24.

After falling by 12% in the run-up to earnings—from $636 on April 9 to $560 on April 24—the stock climbed 9% on April 25. $50 a share. No way that kind of volatility is a result of earnings fears followed by the actual numbers (even with a $2.26 a share positive surprise) unless the news was magnified by big bets in the options market on Apple.

All the evidence says that traders who had placed bearish bets using options that the stock would fall further on earnings got caught on the wrong side of that bet when Apple issued its positive surprise.

Their scramble to close that trade—by buying shares or options on the other side of the trade—certainly provided a big part of the $50 a share jump on Wednesday. (Trading volumes in Apple option contracts hit 1.35 million on April 25, up from 1.26 million contracts the day before.)

What’s the options market telling us now about the short-term bet on Apple? The key price both for longs and shorts is somewhere around $644, the record high set intraday on April 10. Longs are betting using options that Apple’s share price will hit that level in May.

The closer the share price gets to that price, the greater the chance that Apple’s shares will dip as successful longs take profits. And as the stock nears that price, I’ll bet that shorts will start making larger bets that Apple will fall as it did from April 10 to April 24.

Look at Apple’s short-term share price this way: The rewards outweigh the risk below $644. As the stock approaches that level, Apple holders can expect to see the battle between long and short traders intensify. And I think given the odds in favor of profit taking by short-term traders near that level, the risk of another short-term sell-off increases as the shares near $644.

None of this has much of anything to do with Apple’s long-term prospects or the long-term fundamental value of the stock.

From a long-term perspective, I think Apple will fight its way through volatility at $650 or so—that price is also the point at which Apple’s market capitalization approaches 5% of the Standard & Poor’s 500, which has raised fears of an index rebalancing. But it’s likely to take repeated attempts this summer to get above $650.

If you’re building a long-term position, take advantage of the volatility to buy when the shares have been pummeled and don’t let surges to $650 or so make you so giddy that you buy at the temporary top.

If you think a reasonable one-year target price for Apple is $725—and I think that is reasonable—take note that if you buy at $560, your potential profit is 30%. If you buy at $650, your potential profit is just 12%.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund, may or may not now own positions in any stock mentioned in this post. The fund did own shares of Polypore International as of the end of September. For a full list of the stocks in the fund as of the end of September see the fund’s portfolio here.

Tickers Mentioned: AAPL

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