Computing and whiz bang technology phenom Apple (AAPL) reports after the close Tuesday night. Bar none, with a weighting of roughly 4.5% of the SP-500, 13% of the NASDAQ, a meteoric rise this year of 55% and a market cap briefly topping $600 billion despite the passing of Steve Jobs; no other corporate confessional seemingly has the potential to move the broader market as Apple might.

The Number

Apple is expected to show, on traders’ iPad, iPhone, Mac or MacBook Air viewing devices, earnings of $10.07 per share for its second quarter. That compares to last year’s $6.40 and representing a year-over-year gain of 57%. Revenue estimates of $36.75B are a full 50% increase over the prior year’s $24.7B. Beyond the number, plans for unveiling Apple’s fifth generation iPhone, an 8” iPad and the next, next, next big thing, an Apple-based television being called the “iPanel” by some analysts will be likely other topics of interest to investors.

Figure 1: Apple (AAPL) Past Top & Bottom Line Data

Trader reaction to the past four reports working backwards from last quarter’s $3.79 profit beat on earnings of $13.87 and revenue beat are, on a close-to-close basis, as follows: +6.24%, -5.59% on a profit and sales miss, +2.67% on a profit beat and sales miss and +2.42% on a profit and sales beat.

The Chart

Figure 2: Apple (AAPL) Daily Chart

Bulls looking to the technical tea leaves for clues have a corrective Elliott Wave 4 for support. An EBOT has not yet triggered but given its closeness to Monday’s close and AAPL’s past earnings gaps of approximately 2.5% or more, a signal is almost in play. Profit Source’s mid TAPP estimates shares of AAPL could reach $730 by the end of July.

Additional confirmation for bulls looking at the 13.5% drop as supportive for higher prices include the “5, 35” Oscillator just dropping below the zero line Monday. At the same time, AAPL shares held 38% Fibonacci support from last quarter’s pre-report levels while reversing back through the 50SMA in a hammer close.

For the bears, a 50% retracement since last quarter’s breakout to fresh all-time-highs is down near $532. With the corrective action of the past couple weeks AAPL shares are also signaling a bearish 10/30 simple moving average crossover; its first since early November of last year.

Beyond that, given Apple’s fore-described meteoric rise, a test of 200SMA support is still roughly 22% below Monday’s close. Such a test would represent a near perfect 200 point drop from its recent highs. That kind of movement would also be a near classic corrective move of 31%. Believe it or not, at some point in time, all leading growth stocks do acquiesce to such price declines…and sometimes as much as 70% or more while never reaching their glory days again.

Option Activity

In Monday’s session and with more than 1,000,000 contracts traded, what wasn’t busy or favored by option traders might be the better question than what actually held investors interest. Nonetheless and with a put/call ratio of 0.66, concentrated pockets of very heavy interest include both the Weeklys April and May 600 Calls and Weeklys April and May 570 Puts on volume of 20K and 18K in the calls and 14.5K and 19K in the puts respectively.

An outlier of interest, to at least one trader, was spied in the Jan13 655 Calls. A bit more than 11,000 changed hands versus open interest of 4,700 and indicating some fresh opening of positions. Given stiff implied volatility of 33%, but in keeping with rich premiums across-the-board, the well-out-of-the money call maintains protective value of about 5% on mid-market pricing of $37.40 for the likes of a buy-write while allowing for upside, non-adjusted gains of about 21% for the nine month holding period into expiration.

Expected Move

With AAPL shares finishing Monday near $572 the Weeklys ATM straddle was fetching about $40 per spread mid-market on the 570 and 575 strikes. In dollar terms the breakeven analysis of 530 to 615 is simple enough. For more theoretical types, implieds of 85% tell us traders collectively expect a 1SD or 68% chance AAPL will remain within approximately 9% of Monday’s close through expiration this coming Friday.

Pricing of 9% is well-elevated in statistical terms, with short and longer-term range values in the low 20s. It also represents an expensive breakeven for the likes of a long straddle holder based on the past few earnings events where the largest post-earnings move was about 6.25% and action typically followed by a couple days of price consolidation. Thus, the crowd is strongly telegraphing their opinion of an outsized move for the event. Now it just comes down to how you might want to play it; that is, either respecting the crowd or playing a contrarian.

Chris Tyler
Senior Options Writer, former Market Maker & fulltime Option Hedge Hog Advocate
Optionetics.com ~ Your Options Education Site
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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.