$AAPL Turnover?

by CC April 26, 2016 2:03 pm • Trade Ideas

Earlier Dan previewed Apple’s fiscal Q2 results (here) due after the bell. Now we want to detail a couple options trade ideas for those with existing positions who may be interested in hedging, or for those looking to go long but with defined risk into the potentially volatile event.


First let’s look at how to hedge long AAPL shares just for earnings. We’re going to keep this one simple as volatility is fairly low and fireworks aren’t expected. But that means disaster protection is quite reasonable:

against 100 shares of AAPL (104.50) Buy the April29th 100 puts for .80

Rationale – This simple put purchase is for those that just can’t stomach a move below 100 on earnings (inline with the implied move to the downside). It basically protects against any large moves outside the implied move to the downside with unlimited protection below 99.20, for less than 1% of the underlying. Buying puts to protect shares into an event every quarter is a good way to leak gains over time, but in the case like this where 100 may be a breaking point for longer term share holders it may be money well spent to keep your long stock position in tact with defined risk.

Defined Risk Long

The other way to define risk is for those that want to be long AAPL is an in the money butterfly where you know what you can lose on a sharp move lower, and nothing more:

In lieu of 100 shares of AAPL (104.50) Buy the May 103/113/123 call butterfly for 2.80
  • Buy 1 May 103 call for 3.70
  • Sell 2 May 113 calls at .49 (.98 total)
  • Buy 1 May 123 call for .08

Rationale – This limits risk in the stock to about 2.6% of the underlying while providing the potential to gain 7.20 on a move higher to 113 on May expiration. The 113 target is just above the intraday highs in 2016. The trade breaks even at 115.80 so not much is being paid in premium vs the current stock.

A note on implied vol:

We looked to add a yield enhancement strategy for those that are long shares but man, is it hard to find anything worth selling from a dollar pricing standpoint, especially on the upside. As you can see implied vol (red) is much lower than typical into earnings:

[caption id="attachment_63167" align="aligncenter" width="698"]Screen Shot 2016-04-26 at 11.53.24 AM from LiveVol Pro[/caption]

That makes any upside call sales seem like too much risk vs too little reward for those that don;t want to be called away in the stock on a move higher. For instance, we looked at the June 115 calls but they’re only like 67 cents. Why bother.

And with those cheap upside calls, it makes it difficult to find good collar strikes as protection against long shares. (That’s why we kept the hedge idea simple with weekly puts) For instance on collars you’d have to go out to August 120 calls to find anything worth selling. With those you could sell to finance an August 95/85 put spread and pay about .70 for the entire package. But that’s the sort of trade that may make more sense if AAPL pops on earnings to protect against a quick fade if it finds sellers higher.