What do I think will happen with Apple’s stock price after earnings? The current technical price action of the down sloping 50 day and 200 day moving averages and the huge distribution this stock has been under will be colliding with the incredible fundamentals and questions of sustainable growth. What is a trader to do? Trade actual price action.
But for those that want to bet on price action through earnings there are five ways to trade this stock using options for less capital at risk. If you must trade through earnings it is much smarter to express your bet with a few hundred dollars or few thousand dollars worth of options instead of $50,000 worth of stock in my opinion.
-
If you are still bullish on Apple after the recent $200 plunge and believe that the stock is oversold and will rebound much as it has done over the past 9 years then when buying weekly call options to hold through earnings you must understand that you have to add the price of your call option to the strike price. If you are buying a $530 strike Jan 25th call option for $7 then the stock must move to $537 just to break even. Profits are yours above $537 also realize that if it does not move into intrinsic value then your time value of $7 will collapse after earnings to only a few dollars as the volatility of the event is immediately priced out.
-
If you are still bearish on Apple believing that the $200 plunge is just the beginning and that the stock’s monster growth status is over due to its huge size then when buying weekly put options to hold through earnings you must understand that you have to add the price of yourput option to the strike price. If you are buying a $470 strike Jan 25th put option for $6 then the stock must move to $464 just to break even. Profits are yours below $464 also realize that if it does not move into intrinsic value then your time value of $6 will collapse after earnings to only a few dollars as the volatility of the event is immediately priced out.
-
If you think that Apple simply has a 50/50 chance of going either way but believe that it will move big one way or the other creating a huge gap the next morning on the chart then a long option strangle is for you. With a $530 call for $7 and a $470 put for $6 you need a greater than $43 move to be profitable either way. Above $543 of below $457 and the profits are all yours. Your maximum loss is if Apple comes out even at $500 you lose almost the whole $1300 with vega price collapse.
-
If you think the vega pricing is far too high and that the move will be far less than expected due to all the known fundamentals being priced in then a butterfly may be for you. Betting on a smaller than expected move consists of selling an at-the-money call and put at $500 for $18 each and taking in $3600 by being short the options with this short straddle. Then hedging them with a long strangle $540 call and $460 put for $8 combined. Maximum profit is if Apple does not move and stays at $500 after earnings then you collect $2800 in vega collapse after the cost of the long options.
-
We always have the choice to do nothing and trade the gap and trend that develops the next morning after earnings. That is my plan, do nothing and wait for Thursday morning to play the daily range and fish for a post earnings trend or just strangle it Thursday morning with cheap post earnings options.
Whatever you choose to do always manage risk and manage the level of emotional pain that the option trade could put on you. Also understand where the price must go for your option trade to be a winner and how much capital you have at risk compared to your total trading capital.