How to play Apple (AAPL) earnings?

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How to play apple(AAPL) earnings? This is quite tricky, at least for my trading style where I don’t want to risk too much. As I mentioned in my earlier post, playing apple is quite expensive and hence I don’t want to play it unless there is good risk/reward ratio.

Based on my IV and TA, I think apple has all the potential to move by 10%. Now add a little more speculative factor i.e. stock split. I am positively biased for stock split. Net, my criteria for the trade is 1) Bullish bias but protected on lower side, 2) Should be able to accomodate at 10% move and 3) It shd give me flexibility to adjust, in case the trade goes against my plan.

Here are my two ways to play:

  1. Buy 120 Put calendar and 150 Aug/Sept Call calendars for 1.20 and 1.75 per spread. respectivley. This trade is interesting as break-even points are 113 and 166 (a $53 movement!!!!). As of this writing, Apple is trading at $136.5 that gives me about $30 coverage on the high side and about $23 on the lower side. Easily able to accomodate > 15% fluctuation. Maximum profit points are $120 and $150. winning-trade_11.jpg
  2. In addition to the above trade, also buy 115 Aug/Sept put calendar and 155 Aug/Sept call calendar. This widens breakeven points to $109 and $171 i.e. move of about 20%.winning-trade_12.jpg

The beauty of this trade is that this should also benefit from the Aug IV crash after the earning announcement (roughly about 10%). This trade also offers me flexibility to manage the trade should apple go against my plan. The same strategy can be applied to BIDU as well which is announcing tonight. But pls do weigh the risk/reward accordingly.

Profitable trading, OP


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15 responses to “How to play Apple (AAPL) earnings?”

  1. jaykalo Avatar
    jaykalo

    Are these all net debit trades? That is selling aug and buying sept.?

  2. chanck Avatar
    chanck

    Hi OP, very interesting risk / reward ratio. May I ask what software you use to plot the risk / reward graph?

    Thanks for sharing.
    CK

  3. 3heart Avatar
    3heart

    Have you count the IV crash of Sep. Options? That could be ugly

  4. jaykalo Avatar
    jaykalo

    OP, looks like a nice trade on the +ve side on the calls since AAPL touched $150.00 after hours. What adjustments do you now make?
    Congratulations!!!

    Hopefully, someday, I can analyze and place trades like you 🙂

  5. jaykalo Avatar
    jaykalo

    heart, unlikely to see much erosion on the call side of the above trade for Sept expiration given the positive momentum tonight.

  6. Chiu Avatar
    Chiu

    It is very nice risk graph, but the issue is that it needs to wait for one month for the expiration to take
    such kind of profit.

    Assuming the stock prices jumps to the $145 (after hour is around $148-$150?), and within 2 weeks, it jumps further
    to $155-$160, the position will become negative.

    It is good case to look at, after considering the above, I did not put in a trade.

  7. John Avatar
    John

    Calendar spreads are a long volatility play… your current model gives you wide break-evens because of jacked implied
    volatilities going into earnings. When the volatility collapses tomorrow because the earnings are out, the
    breakevens and profit potential of the calendars will implode also. Hope you fare well…

  8. Bob Avatar
    Bob

    The vega differentials between the front and back month can really hurt this spread on the IV fall that is about to
    come

  9. diana Avatar
    diana

    Hi OP,

    Sorry for this rather out of topic question.
    But, what software do you use to plot the the strategy?

    thanks.

  10. Sri Avatar
    Sri

    I beleive the risk analysis is done using ThinkorSwim (broker) Analyze tab

  11. Dan Avatar
    Dan

    The trade looked nice, but when I used Optionvue and reduced the 52 vols to 38 vols which is what happened today, the trade showed no profitability and showed losses due to positive vega. You have to wait till expiration to realize any gains. Hence its not a quick money in and out earnings play. I did NOT put on the trade.

    Today, one day after the earnings the volatility is down to 38 and I would consider putting on such a trade till expiration knowing where AAPL is trading.

  12. traderr Avatar

    diana
    the software is the Thinkorswim trading platform. Check out at http://www.thinkorswim.com

  13. designcurve Avatar
    designcurve

    OP use the thinkorswim.com trading platform to generate the P/L charts. You can download the software free of charge — no account is required to demo.

  14. Midas Avatar
    Midas

    Hi OP thanks for sharing your Trade set up I did take the trade and it is working out nicely.

    I adjusted it in the morning and am currently holding a position that looks similar to other calendars that you have shared with the OPN subscribers over the past couple of months

    I’m looking forward to the return of the newsletter

    Thanks again
    Midas

  15. OptionPundit Avatar

    Thank you all for your valuable comments. Sometimes theory is different from what actually really happened. At the opening the prices were very different and that’s due to inefficiencies in the market. Theoritcially it should have been lower which it might have done it roughly after 20-30mins 🙂

    My traded ended up for about +33% profit.

    Profitable trading, OP

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