Earnings preview Apple AAPL

Apple (AAPL) is set to report its highly anticipated June results today i.e. July 24, after the market close. Besides Google (GOOG), Apple (AAPL) is another popular stock with option tarders to play earnings.

What to Expect: According to briefing.com, here is what traders are expecting:

The Street expects Q3 EPS to grow 33% year-over-year to $10.38 and revenues to grow 31% YoY to $37.43 bln. Not surprisingly, the Street estimates are above the company’s typically conservative guidance of EPS of $8.68 and revenues of ~$34 bln issued on the Q2 release (April). Yet the Street has set relatively low expectations with some analysts even anticipating a Q3 miss.

Another expectation element is around iPhone5/ iPade sales. You may find information on that anywhere on the web so I won’t go into those anticipations.

Options Take:

This quarter IV rise prior to earnings is not as dramatic as it was during the last quarter when VIX equivalent IV of AAPL was at around 50. (Don’t trade AAPL earnings without reading this first).  The IV skew between Jul weekly options (expires this week) and Aug options is about 25%. Which is higher vs last quarter. Bottomline, premiums are elevated but not as much as it was during the last quarter and based on ATM implied volatility, options are pricing a $26+/- move and based on last quoted prices, a $605 (nearest ATM) weeklies’ straddle can be sold for $32.40 credit. Based on the past 4 quarters, AAPL has moved 8-10% during the last 2 quarters and about 3-5% during Jul/Oct 2011 quarters.

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Technical Take

AAPL is again trending upwards with 20dma as support. 50dma is 579.54 and 200 days moving support is 502.33. All time high for AAPL was $644. So it seems that a range play between 550 and 650 could be a good one to trade. And in the most likely scenario either of the trend line will be broken which will set the stage for post-earning move. In the extreme highly unlikely scenario (remember CMG), the stock may move to $680 and $535.

How to Trade:
There are various ways to play earnings. One of the easiest trade is via option straddle or strangle. If you are a buyer, you risk is if stock doesn’t move big (uncertain) and Implied Volatility crash (Certain). If you are a straddle/strangle seller your biggest risk is stock move (uncertain) beyond your breakeven point (recall CMG). If you are fine with the probable range, an Iron Condor strategy could also provide a good solution. If you are an option trader, here are several ways on how you can trade google earnings with a good risk/reward ratio. If your outlook is that stock won’t move, you can also trade earnings via calendars spreads. However if you think stock will sure move, Reverse Iron Condor and/or selling Butterfly could result in nice gains too. Every strategy has its own pros-n-cons choose what you like based on your risk/reward preference.

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WHY DOES IT MATTER:
Apple (AAPL) earning event is one of the events that can provide some exceptional gains in a very short period of time. CMG recently demonstrated the exceptional gains possiblity that are associated with earning events.

WATCH-OUT:
Keep in mind that earnings are always a 50/50 probability event and stocks can move in a much wider range than implied by either option market or forecast by charts.

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Trade carefully, Trade profitably, OP