Now that the majority of the so-called Magnificent 7 have reported earnings with mixed reactions, Apple (AAPL) is on deck this Thursday after the close. Apple’s valuation is a concern for me given the current interest rate, macro, and geopolitical environment. Trading at over 26 times forward earnings, AAPL’s valuation does not reflect the uncertainty with discretionary spending into the end of 2023. Look to Alphabet’s earnings where the market reacted poorly to the Google-parent’s uncertainty around advertising revenue, a reflection of concerns around consumer spending. Additionally, AAPL’s valuation does not seem to fully reflect the contagion risks with China, where nearly 20% of its revenue is derived and where consumer spending is at risk. With analysts expecting about 8% EPS growth for 2024, this feels optimistic. In my opinion, for AAPL to simply sustain this valuation when it reports Thursday, it would need to post not only strong revenue and profit numbers, but provide a positive surprise to its guidance for 2024. While there are some potential bright spots such as India and potential gains from AI, my hunch is that the hurdle is simply too high for the current environment. Looking at a chart of AAPL, its recent break below key support level of $172 is concerning, suggesting that there is potentially further downside to its next significant level of support, which is just below $150. The trade To play for a decline towards that level, I’m going to use a trade structure that I prefer for earnings when options are expensive. I’m looking out to the December expiration and buying the $170/$155 put vertical at a $3.94 Debit. This is buying the $170 puts while selling the $155 puts against it to offset the cost of the long puts. Risking a total of $394 per contract if AAPL remains above $170 at expiration to potentially make $1,106 if AAPL is below the $155 short strike at its expiration date. This gives me an over a 2:1 risk to reward ratio on this trade if AAPL declines on earnings. DISCLOSURES: (Owns AAPL vertical put spread) THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL’S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.
