Trading Apple (AAPL) Earnings with Options

Back in July, I collared Apple Inc. (NASDAQ: AAPL) successfully; the trade not only offered absolute downside protection, but allowed us to make a decent profit on AAPL by being long stock, long an out-of-the-money (OTM) put, and short an OTM call.

In October, I felt a bit more bullish on AAPL just ahead of earnings and went with a bullish synthetic, selling a put and buying a call for a small debit. This synthetic was a ton of fun and proved to be not only very successful, but was also appropriate given the bullish stance I was taking on AAPL in front of the report.

With earnings approaching Monday, I have mixed emotions about AAPL in the near term. I still remain bullish on the stock and believe it looks attractive from a price-to-earnings perspective. Most of the iSlate potential is already built into the stock, in my opinion, although if there is an unknown feature or distribution channel that was NOT expected, we could see an excessive upside move. More news on the rumored tablet is expected (but not confirmed) on Jan 27th.

The way I rationalize my thesis on product rumors is by searching through all of the most popular financial and technology-based blogs and articles and discovering what the masses believe that the iSlate (or whatever they choose the name to be) will be when it comes to market. I also pay close attention to the expectations the masses are placing on a certain product and evaluate the stock’s movement throughout the course of this news stream.

People can get quite creative and some seem to have a very good idea about what a product will look and function like and some may have sources on the inside from which they gather their data.

I have noticed that many of these “rumors” about Apple products, specifically, have been quite accurate. I also believe the market prices in the bulk of the technological expectations for a product like the iSlate or whatever name it eventually takes.  When the product is finally released, the market compares its data and features to what was expected and the stock will then deviate accordingly.

Again, this is an art and a bit of a gamble. There are obviously many unknowns, but I believe overall the Street still likes AAPL and the company will continue to innovate and excite us, not only on a product and services level, but culturally as well, which should translate into higher prices being paid for their stock.

In technical terms, after stocks took a  nosedive yesterday following a special press conference from President Obama, AAPL’s support comes first at around $208 and then again around the $203 level, which is the site of the 50-day simple moving average (SMA). Apple created a nice channel between mid-October and the end of December, which gave the stock some levels we can use to find support and resistance.

The breakdown of the S&P Wednesday and Thursday does concern me, despite the fact that I have been calling for an 8% correction in the broad market.  Mr. Obama may have actually helped my prediction come to fruition, even while questioned certain elements of his speech. Anyway, back to Apple …

The selloff can actually work to our advantage if we have a bullish bias as puts get more expensive and calls cheaper when stocks drop. With that said, I am looking at another bull synthetic in AAPL. I’ll collect a credit this time with my put strike below $200, to allow for some movement in AAPL.

With AAPL around $208.00, the February 195 put can be sold for $4.15 and the 230 call can be bought for $2.48, netting us $1.67 or a little less than 1% on our total risk in the trade. Obviously, the credit is not the expected return in the trade.  What I would prefer would be an extreme sharp rally in the stock, which would enable me to close this risk reversal for more than the credit I collected.  In other words, selling it for any credit would be a win – even buying it back for up to $1.67 would still be profitable.

The bottom line is that I still want to be bullish, but in case things don’t work out and AAPL just stays here, I can make some coin as well. By doing this trade, I am also okay with owning AAPL for $193.33 – a level that is below the current support I pointed out earlier.

Alternatively, if you are slightly more bullish and want much less risk and feel that AAPL my settle in around $220 into February expiration or after its earnings report, you could examine buying an OTM call butterfly using the February 210, 220, and 230 calls for a cost of about $1.40, which is the max risk in the trade.  It’s a cheaper alternative to just buying the 210 or 220 call and will not have as large a vega exposure, nor will it suffer as much damage from time passing by.

Just a couple of strategies ahead of Apple’s Monday report. Remember to always hedge your bets