Low-hanging fruit?

03/11/20
  • AAPL fell 22% from Feb. 12-28
  • Call options were discounted even more
  • Bulls could play long calls or short puts

No corner of the market has gone untouched in recent weeks, as the biggest names of the bull market took their coronavirus lumps along with everyone else. Tech giant Apple (AAPL), for example—a stock that gained nearly four times as much as the S&P 500 (SPX) from the December 2018 lows to the February 2020 highs—fell roughly 22% from February 12-28.

It’s no secret why. With production facilities in China, Apple was an early focal point of rapidly escalating coronavirus fears, and the company understandably warned in mid-February that it probably wouldn’t meet the Q1 sales forecasts it had put out just three weeks earlier.1

But it’s possible that Apple’s decision to get in front of the story—get the news out there, and move on—paid some dividends, as the following chart shows that on Monday, when all the major US indexes tumbled below their February 28 lows on the worst day for the market since 2008, AAPL made a higher low:

Chart 1: April WTI crude oil (CLJ0), 9/11/19–3/9/20. Crude oil price chart. Profile of a price war.

Source: Power E*TRADE


The ongoing coronavirus story has paralleled the trade-war saga (which was the market’s dominant story for most of the preceding two years) in that stocks have been whipsawed as “Things aren’t as bad as we think” headlines have alternated with “We’re not out of the woods yet” headlines on an almost daily basis (don’t forget to throw in an oil price war, for extra volatility).

In other words, there’s likely to be more volatility. But that may be a moot point to bulls who see AAPL call options trading at steep discounts from a just a few weeks ago, and put options still at relatively high levels (for those seeking to go long by shorting puts).

For example, even when AAPL was nearly 5% higher (around $279) yesterday morning, the June $280 calls were trading for $25—less than half of what they were going for on February 12:

Chart 3: S&P 500 (SPX), 12/9/19–3/9/20. S&P 500 (SPX) price chart. SPX hits 61.8% retracement.

Source: Power E*TRADE


But this chart also shows those calls were twice as expensive as they were at the February 28 low, which may be a dog whistle for traders who expect to see at least a few more down days, even if they believe the coronavirus scare is closer to its end than its beginning, and the market is in the general neighborhood of its sell-off lows.

In those moments, long-side traders may find they can buy calls on in-demand stocks like AAPL at discounted levels, and sell puts at an even higher premium than they could yesterday.

Market Mover Update. April crude oil futures (CLJ0) regained some of Monday’s steep loss, rallying more than 15% to close above $34/barrel.

On Monday, Microsoft (MSFT) April $140 puts were up as much as 559% from their March 2 close, and yesterday were still up more than 300% despite the stock’s rebound (see “Going long with puts”).

Today’s numbers (all times ET): Consumer Price Index, CPI (8:30 a.m.), Atlanta Fed Business Inflation Expectations (10 a.m.), EIA Petroleum Status Report (10:30 a.m.).

Today’s earnings include: Monarch Casino & Resort (MCRI), Semtech (SMTC).

 

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1 Reuters. Apple warns sales to fall short of target due to coronavirus impact. 2/17/20.

What to read next...

03/10/20
Oil price war slams crude oil prices, sends S&P 500 to key retracement level.

03/09/20
Volatility reigns as market fights to stay above late-February lows.

03/06/20
Airlines have led the market to the downside during the coronavirus scare. Can they lead it back up?

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