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Option Watch: Apple Earnings Preview

By Chris Tyler, Optionetics.com | Tue January 24, 2012 7:52AM PT

In front of Tuesday night’s earnings report, shares of Naz’ heavyweight gadget goliath Apple (AAPL) displayed a bit of relative strength in reclaiming its 10SMA and gap gainer of 1.69% on Monday following a two day slide off fresh all-time-highs. With a sturdy-looking weekly uptrend intact, but possibly one of those pesky double tops that might raise eyebrows, as well as Profit Source suggesting some topping via a daily W5 and weekly W3; what’s a trader to think about Apple’s immediate future?

For their part, option traders Monday were grazing in above average volume of 333,000 contracts with favor concentrated in the calls by a 1.66-to-1.0 margin based on a put/call reading of 0.60. The expected move in Apple as determined by its Weeklys January 430 straddle and 420 / 435 strangle markets suggests traders are bracing for a possible move of about $18.75.

The calculation for the expected move adds Monday’s straddle market of $22.60 and strangle priced at $15.90 and divides by two. A figure of $18.75 represents a move of just less than 4.5% and in keeping with recent percent range, earnings estimates set by traders.

An alternative means to this estimate would be to calculate the move using the bell curve and implied volatility. With surrounding money Weeklys option volatility of about 64% based on one standard deviation or 1SD and traders still have four days until expiration, using the square root of time (365/4) and dividing that by 64% results in a value of 6.7%. This means traders believe there’s a 68% chance AAPL will remain roughly between 399 and 455 through expiration this Friday.

Figure 1: Apple (AAPL) Weekly Chart & Expected Move

Averaging the two sets of expectations and a figure of roughly 5.5% for the expected move remains in the ballpark of past pricing. When used in conjunction with information regarding what trader reaction actually was following other earnings events, traders can attempt to design stronger positions based on potential patterns recurring once more.      

Digging a bit deeper into Monday’s volume, three spots caught our eye. The January 2013 500 call traded just more than 2,000 contracts. Compared to existing open interest of about 25,000, whether the action represented the opening or closing of a position is difficult to say with strong authority. It does however appear to be the result of a trade recommendation based on the action being the result of multiple smaller prints rather than one or two block trades.

Determining if the January call action was the work of buyers or sellers also remains a mystery. With implieds in the mid 20s and near multi-month lows, the former could purchase the contract cheaper than otherwise. Yet, still roughly 20% out-of-the-money and shares just removed from all-time-highs, we’d be personally hesitant to call those traders long call buyers. Our view is the contract looks more suitable as a closing sale or perhaps part of a long stock / short call delta neutral ratio write.

Figure 2: Apple (AAPL) Long Calendar

Finally, the two other spots which caught our attention was the very even action of about 10,000 contracts apiece placed in the near / at-the-money Weeklys January 430 and February 430 call. Together, one possible spread of interest would be the long calendar. Shown above is a one lot illustration using Monday’s closing price of $3.70 per spread.

The pricing of this calendar reflects a sale of the more beefed up looking “front-week” volatility of 64%, while purchasing back month volatility of 33%. Buying low and selling high which this spread executes sounds good on the surface. But the crux of this this type volatility/short gamma position needs to also ask the important question of what will today’s skew look like tomorrow or on Wednesday or even Friday when implieds come together but also see a likely systematic drop in both contracts.

To that question and after looking at range implied and statistical values for the past three months and plugging in a very different skew into our Platinum option calculator, our view is there could be more than meets the eye for those buyers immediately after the report on Wednesday. However, if you’re not comfortable with the possibility, even if not an odds-on favorite, of an equally fast loss; less skew and more certainty outside of the earnings game is an option to consider.  


Chris Tyler
Senior Options Writer, former Market Maker & fulltime Option Hedge Hog Advocate
Optionetics.com ~ Your Options Education Site
Visit Chris Tyler’s Forum
The information offered here is based upon Christopher Tyler’s observations and strictly intended for educational purposes only, the use of which is the responsibility of the individual. 

Recent articles by Chris Tyler, Optionetics.com

September 21, 2012  -  Wall Street's Friday Lunch Options
September 21, 2012  -  Hot Shots: All Aboard or Train Wreck?
September 20, 2012  -  Wall Street's Thursday Lunch Options
September 19, 2012  -  The Expected Move: Bed Bath & Beyond Earnings
September 19, 2012  -  Wall Street's Wednesday Lunch Options


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