An effective, cheap hedge on Apple shares into earnings, according to Mike Khouw
Apple shares just hit a new all-time high last week, but some mounting concerns could weigh on the stock leading up to and after its earnings report later this month. I’ll describe a way to hedge an Apple position. Apple (AAPL) is the largest publicly traded company in the world. The company designs, manufactures, and markets smartphones, personal computers, tablets, wearables, accessories, and related services. The largest source of revenue is the iPhone, and the company released its iPhone 16 last month. Other Apple products include Mac computers and iPad tablets, Apple Music, the Apple Watch, and other wearable devices. It includes AppleCare, Cloud Services, Digital content, and Payment services (ApplePay). Apple has entered entertainment with the Apple TV+ streaming service. While 60% of Apple’s revenue comes from outside the Americas, it dominates smartphone sales in the United States with nearly 60% market share. Android mobile devices indeed have a more significant smartphone market share internationally. The number one global smartphone manufacturer, Korea-based Samsung, outsells Apple in terms of units sold. However, investors count profits above units, and Apple’s only peers in the profit category are Microsoft and Saudi Arabia’s publicly traded national oil company, Aramco. There’s more good news for Apple when one looks at consumer surveys. While Android users generally rank their devices above Apple’s in terms of cost, android users who switch to Apple consistently rank the iPhone product and user experience higher. A premium product, a dominant market position, and a new release highlighting AI features in the iPhone 16, what’s not to like about Apple going into earnings at the end of this month on October 31? Well there are a few things: Consumers are stretched, and the iPhone 16 is an expensive device. Analysts have been reducing their estimates on iPhone 16 sales, so the previously anticipated refresh “supercycle” — which some analysts expected based on AI features and others, including myself, believed might have tailwinds associated with changing from proprietary lightning ports to USB-Cs — may not materialize. China — Apple depends heavily on China for both manufacturing and sales. Twenty-six percent of iPhone users are in China, and political rhetoric has ramped up during this election cycle, including talk of increasing tariffs on imported goods generally and China specifically. Government regulators — Apple has not had meaningful government interventions in its business affairs, but that could change. The Feds are looking for any unfair market practices by companies in dominant positions. Of course, that list includes Apple. The DOJ filed suit in March of this year, allegedly violating antitrust laws by monopolizing the smartphone market. Apple naturally filed a motion to dismiss, but the case will likely proceed for some time. Valuation — Apple’s pace of EPS growth has slowed significantly, as has topline growth. At the same time, buybacks, while significant in absolute dollar terms — the most recent authorization targets $110 billion — are less meaningful on a relative basis given the company’s nearly $3.6 trillion market cap. At 31.5 times forward earnings estimates, Apple is four turns richer than the 27.5 5-year average. The trade While some analysts remain very bullish, Dan Ives of Wedbush, for example, reaffirmed his “outperform” rating with a $300 price target on Friday, most others have more modest expectations. AAPL YTD mountain Apple, YTD I realize Apple is possibly the most broadly owned publicly traded stock in the world, and I expect it will remain one of the most profitable for many years, but I also feel that the upside from here is likely to be more muted or incremental. Therefore, I would offer the following “put spread collar” idea to hedge a modest downside move following earnings by purchasing a put spread against a long stock position financed by selling an upside call. Sell Nov. 8 $220 put Buy Nov. 8 $230 put Sell Nov. 8 $245 call f you do not already own the stock one might consider a diagonal call spread as a lower risk way to play from the long side than buying the stock going into earnings (and the election). DISCLOSURES: (None) All opinions expressed by the CNBC Pro contributors are solely their opinions and do not reflect the opinions of CNBC, NBC UNIVERSAL, their parent company or affiliates, and may have been previously disseminated by them on television, radio, internet or another medium. THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . 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