Goldman's Latest Trade Recommendation: Sell Apple Puts - Loss: 30% In One Day

That's right: nothing like a little virtually unlimited downside just head of the most groundbreaking (if somewhat priced in) announcement in Apple history. We can only hope this recommendation to sell Apple $300 January Puts, with an initiation date of, well today, was purely a function of impeccably bad timing, because if Apple opens tomorrow at the futures closing price of $357, these will be worth $14.21: a rather unpleasant 30% loss in a few short hours.

From Goldman:

Sell Puts on AAPL ahead of September iPhone launch

Sell AAPL January 2012 $300 puts, collect $11.05 (3%, stock $373.60) ahead of earnings and strong product pipeline. GS Hardware analyst Bill Shope believes that Apple’s secular momentum in smartphones, tablets and mobile computing should remain  resilient, even if macroeconomic conditions deteriorate. He sees 28% upside to CL-Buy shares over the next 12-mths. AAPL shares have outperformed over the past month (down 11% vs S&P500 down 16%), and he expects them to continue to outshine other tech companies given the company’s differentiated product offering and market share gain opportunities.


With iPhone refresh in September, iPhone demand should remain strong into holidays despite macro pressures. Our analyst expects that the iPhone 5 introduction will occur in September, with an iPhone drawdown occurring prior to launch, and followed by a hyperseasonal December quarter. He forecasts 16.9 million units will be sold in the September quarter and 26.3 million units in the December quarter. He notes that recent press releases suggest that early orders for iPhone 5 appear strong, indicating that iPhone demand will remain robust in the back half of 2011, even with increasing macro pressures. 


Apple scores highly on our GS SUSTAIN framework, an ideal holding for uncertain times. Apple combines sector-leading returns on capital with a leading industry position – it ranks in the top decile on both measures in GS SUSTAIN’s analysis of the global Hardware sector. Apple’s sector-leading cash returns are likely sustainable due to its exposure to structural growth in its addressable markets (Smartphones, Tablets, etc.) and continued leadership in product development (as evidenced by its recent iCloud announcement). The company has been able to leverage its strong product development cycle and industrial positioning with solid management quality to generate first quartile return on capital (35%), forecasted from 2011-13E.


Sell puts to get exposure to AAPL closer to our analyst’s downside level. AAPL six month implied volatility of 38% is in its 98%-ile over a 1-yr period, and 12 points above realized. Normalized skew is also elevated in AAPL, at 3 standard deviations away from its 1-yr average. Earnings are not typically a large driver of Apple realized volatility (average +/-2.5% move over past 8 quarters). By selling the January 2012 $300 puts, investors collect $11.05, which essentially brings their entry point to $288.95, or 8% away from our analyst’s bear case scenario of $267 (-29% from today). Put sellers commit to buying stock at $300 if shares fall below this level by January expiration.

Nothing like a little skewed up/downside:

And while clients are selling puts to Goldman, Goldman is, logically, on the other side of the transaction.

h/t @cmr333


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