Three Apple Ecosystem Trades

Use options to get exposure to the Apple ecosystem.

After being an afterthought for much of the year Apple (APPL) was thrust back into the limelight last week. The release of Apple iPhone 7 was supposed to be much ado about a headphone jack and not expected to spur a big upgrade cycle. So it came as surprise when sales surged and initial inventory quickly sold out.

The immediate response was to push Apple shares up some 11% over the next 4 trading sessions, it’s best weekly performance in over 18 months, to a new 2016 high of $116. Granted Apple may have benefitted by capturing sales from rival Samsung after its Galaxy7 burst into flames, forcing a recall, but make no mistake, the positive reception to the iPhone 7 was a testament to the ongoing loyalty to Apple products.

And much as the Apple ecosystem has been credited with keeping customers loyal and within its walled operating system, that ecosystem also casts a favorable and protective halo over the companies who supply the parts to Apple products.

Indeed, shares of AAPL suppliers also enjoyed a stellar week in the wake of the iPhone release with many gaining 15% or more. The question now that have risen sharply is they could offer low-risk trading opportunities in coming weeks.

Using options to get exposure to the group is a more efficient use of capital and lower risk than buying shares of these now high flying stocks. Let’s take a look at three names that could be good buys on pullbacks.

1. Skyworks Solutions (SWKS)  supplies semiconductors and is said to have the largest, some $23 worth per phone, of components in the iPhone7. Shares leapt some 15% to a 6 month high of $77 in the days following the release. This is near the 2000 high at 78.25 in the first quarter of 2015 and topped out at an all-time high near 113. The subsequent downtrend failed the breakout during the August 2015 mini flash crash, with the price continuing to lose ground into the February 2016 low at 54.50.

Price action since that time has carved a triangle with resistance at the failed breakout level. On Balance Volume (OBV) has lifted with price, with buying volume raising odds for a breakout that opens the door to the .618 selloff retracement and August 2015 breakdown gap above $90. A broader consolidation while a rally into the mid-90s will favor a continued advance into triple digits in coming months.

swks-chart-9-21-16

Cirrus Logic (CRUS) provides amplifiers and microphones and AAPL enthusiasm generated a $9 or 19% rally to new multi-year high of $56 per share. The stock now trading just five points under the The stock carved a 2-year higher low after the third peak and returned to resistance in May 2015. A sideways pattern into 2016 completed daily and monthly cup and handle in early 2016 ahead of a powerful July breakout that’s now testing 21-year resistance.

It will take time to exceed that barrier, but excellent reward potential after a breakout tells observant market players to add this play to their watch lists. Shorter-term, a pullback that tests the gap between 43 and 46 should mark a low-risk buying opportunity for both intermediate position traders and long-term market timers.

crus-chart-9-21-16 

Broadcom (AVGO) provides digital storage and shares gained some 6.2% to $173 but remain below its 52-week high as $181. That said, the stock has enjoyed a fairly orderly uptrend and is now trading in the upper half of the channel. This is a high-risk buy zone because it could easily drop to channel support near 160, which marks a lower risk entry. Also, OBV failed to break out and is flashing a bearish divergence that intensified in the first half of September. Given adverse reward: risk, it makes sense to stand aside until price action gets closer to 160.

avgo-chart-9-21-16

The Strategy

AAPL suppliers rallied with the tech giant last week, and could gain additional ground in the fourth quarter. Even so, it isn’t wise to chase the upside because technicals predict more favorable entry prices after the current crowd undergoes a shakeout of weak hands.

My approach will be to wait for pullbacks towards support levels and then buy at-the-money calls with at least six months until expiration.

This will allow for an efficient use of capital that can be spread across a variety of names, provide excellent upside exposure with limited downside risk.

Like this article and want more great market insight and trading ideas? Find out about my $20K Portfolio. The 20k Portfolio is an option based newsletter providing specific trade recommendations. Since its inception in January, 2015 it has gained 87% in the 18 month period ended June, 2016.

— Steve Smith

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About the Author: Steve Smith