Bobbing for Apple (AAPL)

by CC July 26, 2016 11:31 am • Commentary• Trade Ideas

Earlier, Dan did a deep dive on Apple (AAPL) prior to tonight’s fiscal Q3 earnings report. He also reiterated our feelings on how we view (and be careful about) trading into and out of earnings events in his Morningword.

With both those posts in mind let’s look at the options in AAPL into the event and see if anything stocks out for those looking to add yield or hedge an existing AAPL holding as well as something for those looking to be long AAPL with defined risk.

Let’s start with protecting a long. As Dan mentioned, AAPL stock has had its struggles over the past 15 months since making an all time high in April 2015, is down in 2016 and remains in a well defined downtrend. Therefore, those that are long may want to make sure they don’t find themselves in a situation of having to make a decision on whether to throw in the towel on a decline from here. Option volatility is quite cheap historically for an earnings event. Whether that reflects boredom with the stock in general or some sense that it’s going to continue to consolidate around 100 for some time, it’s a good opportunity to protect against the unforeseen:

Hedge against 100 shares of AAPL ($97):

Buy the July29th weekly 97 put for $2

Rationale – Weekly vol is about 50, which is pretty cheap compared to previous earnings. This is about 2% in the underlying but essentially locks protection in the stock below 95. That not only means there’s no need to panic on your shares on a move below but it also means that those that were looking to buy more shares at 90 or below could do so without the risk of an existing stock position below. The risks to this hedge are that it becomes worthless. That’s fine if AAPL were to meaningfully move above 100 as the cost of holding onto the position with the hedge could easily be justified. What wouldn’t be great is if the stock goes nowhere because the hedge would then cost you 2%. So this is for those with a long term core position but with a possible itchy trigger finger that don’t want to be forced into a bad decision lower in the stock.


With implied vol so low there aren’t a ton of ways to add yield into this event. Upside calls are pretty cheap so any sales close to the money brings up the question of why you’re long the stock to begin with if you’re willing to be called away. But there are ways to add leverage to what has become a boring stock in the case of a move higher.

Leverage against 100 shares of AAPL ($97):

Buy the August 100/105 1×2 call spread for 80c

  • Buy 1 August 100 calls for 1.12
  • Sell 2 August 105 calls at .21 (.42 total)

Rationale – This trade costs just .80 yet has the potential to add leverage of up to 4.20 on a move to 105 or above before August expiration. IT does run the risk of being called away in the stock above 105 but unlike a simple buy write (selling an upside call vs the long stock) it increases the potential call away spot to an effective price of 109.20. So if the stock is above 100.80 it’s like being long twice as many shares until the stock is 105. Above 105 the profits of the overlay stop but any move above 105 and it’s like selling your stock at 109.20 (you don’t have to be called away, you can just take the profits from the overlay by closing the options before August expiration. Consider this a super charged Buy-Write. The main risk on this trade is if the stock is below 100.80 on August expiration, in that case .80 is lost, but that’s good risk reward for the chance at the 4.20 in additional profits on your stock on a move above that level.


The final thing to look at is stock alternatives. In this scenario you may be a person looking to go long AAPL, but would be nervous into the event at this entry, and possibly want to lower the level of potential entries on a selloff while still participating if the stock gaps higher after the release. Think of this as a nervous entry trade:

In Lieu of 100 shares of AAPL ($97):

Buy the September 90/105 1×2 risk reversal for 15 cents

  • Sell 1 Sept 90 put at 1.05
  • Buy 2 Sept 105 calls for .60 (1.20 total)

Rationale – This trade means you’d be put the stock if it was below 90 on September expiration, so it’s only for those willing to buy the stock there. But on the upside you get twice the bang for your buck if the stock is above 105 on September expiration because the 90 put finances owning 2 of the 105 calls. So if the stock goes higher, you can participate for twice the amount of deltas than if the stock goes lower (where you would also be happy buying the dip).