APPLE Earnings Preview: Rotten to the Core?

Published on: Apr 23 2013 by John Critchley

Apple (AAPL) is battered and the tech giant is on life support.  Will investors continue to core the underlying or is a rebound in the cards?  The investing world waits with much nervous apprehension as Apple reports its first-quarter earnings on Tuesday, April 23 after the close.  

The big mo (momentum) has not been on Apple’s side for some time, and recently the tech giant broke under the $400 level for the first time since late 2011.

The fall from grace for the much adored tech behemoth has been well chronicled and stunning.  Since a 52-week high hit in September of $705, Apple has been on a death spiral, closing at $390 last night. That’s a 44.6 percent plunge in just over the past four months. Ouch!!

This coring comes in sharp contrast to the rise in the overall market (SPY/S&P 500) of nearly 14% over the past 52 weeks

 

 

Source:  http://sogotrade.com   

Analysts expect Apple Quarter 2 earnings of EPS of $10.08 on revenue of $42.53 billion. This compares quite unfavorably to the profit of $12.30 per share on revenue of $39.19 billion last year. (Click Here)

Will this downside swoon continue post-earnings or will sentiment emerge that the recent bout with selling was overdone?

The bearish camp rests it’s bets, however,  on the fact that Apple’s reputation for blowing away even the highest expectations was dented by the latest two earnings ‘misses’ in July and October. Last quarter, Apple also missed the Street’s already-lowered expectations revenue numbers.  This latest miss ignited the current swoon that has seen Apple give up nearly $300 billion in market capitalization.

 

How Apple has reacted after reporting earnings over the last year and a half does not offer us much guidance directionally.  In this aspect, Apple has a mixed record over the past 7 earnings reports. The shares have gone lower the following day in four of the past six earnings releases and higher after the other three reports. The underlying moving (non-directionally) an average of around 5.98%  If take a shorter time horizon, the declines last three quarters do not bode well for tomorrow earnings.

 

The analyst community is still in love with Apple.  Despite the fact that over the past month there has been numerous downward revisions, 43 analysts that follow Apple still rate the underlying a Buy/Outperform and only 10 have it as a hold.

There are no sell recommendations on the underlying despite some possible deterioration in some core fundamental metrics.

 

Options Play

Confused on what to do with the earnings?  Long or short?  How about playing both ways? We present an option play for those inclined to believe that Apple will have an outsized move, but aren’t sure which way it will go and do not want to pay too much premium on this speculative bet.

With Apple trading over 44% off it’s 52-week highs, the implied volatility of the options is not far away from its 52 week highs.  The 30 day implied volatility is trading around 41.85%, only a touch less from the 52 week implied volatility high of 44.43 % hit just last week.

Source: Livevol(R) Pro (www.livevol.com)

These elevated implied volatilities make initiating a long At-the-Money straddle position (Buying the 400 calls and puts) a very expensive proposition.  How do we advantage of any post-earnings move in the underlying in either direction if the premium is so elevated?

Let’s buy a strangle which is a cheaper alternative in a pure premium sense than straight buying a straddle.

This is not a specific trade recommendation, but a trade analysis.

Trade idea #1–A Long Options Premium Play with a slight bullish tint

To find a pure earnings option play, one could go out to the April ‘26 2013 weekly options, which present some short term value.

The play:

a)      Buy April ‘25 2013 weekly 375 put/415 call strangle for $ 12.35.  The implied volatility of this strangle is seemingly quite high at approximately 80.4% IV (Implied Volatility).  This IV reading is, however misleading because the most important determinant of an options real value as it gets closer to expiration is the premium only, not the actual IV% reading.  The premium over parity (POP) number of $12.35 is what is really important in this case.

Net debit: $12.35

Why the April ‘26 2013 weekly 375 put/415 call strangle?  The answer is three-fold:

1)       The At-the-Money (ATM) April ’26 2013 400 straddle is trading for $28.40 and the breakevens for this straddle in the underlying are $428.40 and $371.60 respectively.  These breakeven points represent a 7.25% move in the underlying. This percentage is higher than the average post earnings move in Apple mentioned earlier in the article and seems expensive.  Not much of a bargain.

2)      The April ’26 2013 375 puts/415 call strangle is priced at $12.35, making the breakeven points in this strangle, $427.35and $362.65 respectively.  These breakeven points do represent a greater move in the underlying on the downside, but nearly exactly the same on the upside) versus buying the ATM (AT-the-Money) straddle, but has the advantage of costing less in pure premium. This lessens the potential total loss in the unexpected case that the AAPL underlying has a muted response in a similar fashion to the last earnings release.

3)      This strangle has an upside bias.  Why?  Apple has fallen 44% from its highs of just over three months ago and there may be more upside potential than downside potential.  The majority of the downside may be already baked in, but if there is an upside earnings surprise, we could see a massive upside squeeze.  Let’s lean to the long side.

Risk:  The earnings report does not cause the expected movement in the underlying.  Be forewarned.   You may lose the entire premium.  This play is for speculative monies only.

Source:  http://sogotrade.com   

Stay tuned………

Note: The Prices are quoted at time of submission and do not reflect current market prices.

 

Disclaimer


We are not liable for any trading decisions made by any reader. NO advice is given or implied. The information offered in this article is for demonstration purposes ONLY and should not to be either construed as an offer or considered to be a recommendation to buy or sell any options.

Your use of this information is entirely at your own risk. It is your sole responsibility to evaluate the accuracy, completeness and usefulness of the information. You must assess the risk of any trade with a professional broker, or financial planner, and make your own independent decisions regarding any trades mentioned herein. This is not a solicitation to buy or sell any options, or to purchase or sell any credit spreads. Trading options only carries a high degree of risk, is not suitable for all traders/investors, and you may lose all of your premium money invested in the options. If you have never traded options before, we strongly recommend that you read a little background information made available by the government. Only you can determine what level of risk is appropriate for you. Also, prior to buying or selling an option, a person must receive a copy of Characteristics and Risks of Standardized Options.

Past performances DO NOT guarantee future results. Please consult with your own independent tax, business and financial advisors with respect to any trade. We will NOT be responsible for the consequences of anyone acting on this purely demonstration material.

Important Note: Options involve risk and are not suitable for all investors. For more information, please read the Characteristics and Risks of Standardized Options.

 

 

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