Bank of America shares a trading strategy designed to boost returns from a 'potential blow-off' rally in Apple's stock as it surges past big-tech peers

  • Apple recently became the first US company in history to earn a $2 trillion market valuation. 
  • Analysts and options traders remain overwhelmingly bullish on the company, and one Wall Street firm even says Apple is still not as richly valued as its rivals.
  • Bank of America derivatives strategists recommend an options trade that should amplify further gains for investors in the stock. 
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In the pandemic-fueled boom for technology companies, Apple stands head and shoulders above its peers. 

The iPhone maker's stock price actually lagged the recoveries of its mega-cap peers for much of the period since the market bottomed in March. But its ascent picked up speed mid-July, after the company reported better-than-expected earnings.

Apple has now earned a 72% year-to-date gain that is 16 percentage points greater than the so-called FANGMAN stocks that includes Facebook, Microsoft, and Netflix, according to Bank of America data. 

That acceleration helped the company become the first in the US to reach a $2 trillion market capitalization last week. Since then, the gains have barely slowed down.  

Even at these levels, analysts are confident that the stock has fuel remaining to help itsoar even higher. Morgan Stanley says the company is still not as richly valued as its rivals on a cash-flow basis, and has a 37% rally in its bull case.

In the same vein, Wedbush has a 40% rally as its best-case scenario because of the release of the iPhone 12 and a massive upgrade cycle in the offing. 

It is not just analysts who are exuberant on Apple's prospects. Options traders, who seek to profit from the direction and extent of moves in the stock market, are overwhelmingly betting that Apple will continue rallying. And considering the animal spirits at work, Bank of America's derivatives strategists have devised an options trade that should accelerate gains for those who are already long, or betting on the company. 

A team including Gonzalo Asis pinpointed two unusual features of Apple's move higher.

First, the stock's implied volatility has been moving in tandem with the price, demonstrating that traders do not expect the frenzied move to temper anytime soon. 

The second dynamic at play is that options traders are placing outsized premiums on bets for higher prices relative to bets that the stock will go down. This phenomenon, known as call skew, has been lower only less than 15% of the time during the past 10 years. Once again, it shows that there is little demand among to hedge their downside. 

"One trade that sets up well given high vol/flat skew is to buy 1×2 call ratios (+1x/-2x) as an overlay to a long stock position," Asis said in a recent note to clients.

"For instance, buying 1x Oct20 565 call (ref. 503.4) and selling 2x Oct20 650 calls costs 72bps, indicatively," he added.

"On the upside, the overlay allows to gain accelerated upside up to the short call strike (650). The overlay starts underperforming the long stock position if AAPL rallies beyond 731 (45% upside from here)."

History suggests that a rally more than 45% from current levels would be rare, Asis found. Apple has only gained more than 45% once in the subsequent two months after a six-month stretch of gains.

With all that in mind, traders should also be diligent to consider strategies that limit their downside if Apple's post-pandemic fuel runs out. 

"While upside for Apple may continue from here, we find the vol surface sets up well for some attractive hedges, in particular should the majority of Apple's increase in valuation post-Covid currently be priced-in," Asis said.

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