Event: Apple (AAPL) will report their fiscal Q2 earnings today after the close. The options market is implying about a 3.5% one day move following results, as the May 6th 148 weekly straddle (the call premium + the put premium vs stock $148) is offered at $5.30, or $3.6% of the stock price. That is the implied movement between now and this Friday’s close, most of that move is being priced for the earnings event. If you thought options were priced to cheap, and thought the stock was going to move one way or the other, but unsure which and bought the straddle (and thus the implied move) you would need a rally above $153.30, or a decline below $142.70 to make money.
Price Action / Technicals: AAPL is up nearly 28% year to date, gaining a little more than $200 billion in market capitalization, basically the value of Chevron (CVX) (a company expected to have $145 billion in revenues this year) Here’s another perspective on Apple’s rally, less than 25 companies in the S&P 500 have market caps greater than $200 billion Apple has gained year to date.
From a purely technical standpoint, there is obviously no overhead resistance. To my eye though, $140 appears to be near-term technical support, which also happens to be the intersection of the uptrend from the stock’s post-election lows. Below that though, the fQ1 earnings gap to $130 should serve as very healthy downside support, with a gap fill to $120 unlikely anytime soon, barring some sort of Samsung Galaxy product meltdown or a major market correction:
Frankly, I have nothing else to add. The company has $250 billion in cash ($165 billion net of debt), a $230 billion annual revenue base expected to grow this year after last year’s first revenue decline in 15 years and an impending new product cycle. Trying to pick holes in a universally loved story is a useless endeavor. But similar to GOOGL and AMZN earnings last week we can look to the options market for those looking to define risk, add yield, leverage or protection. So let’s take a crack at that, especially for those with existing positions and or a directional inclination into the print.
Stock Alternative in lieu of 100 shares of AAPL (147.50)
Buy the May 145/155/165 Call Fly for 3.00
- Buy 1 May 145 call for 4.30
- Sell 2 May 155 calls at .70 (1.40 total)
- Buy 1 May 165 call for .10
Breakevens on May expiration: 148, 162
Losses of up to $3 below 148 or above 162 with total loss of $3 below 145 or above 165
Gains of up to $7 above 148 and below 162 with max gain at 155
Rationale – This trade targets a move higher, a few dollars above the implied move for the event. The great thing about this trade is the defined risk of just $3 establishes a breakeven just above where the stock is currently trading. Meaning it’s like entering the stock at 148 but with defined risk of just $3 in case the stock sells off on earnings. (implied move about 5.30). There’s a small chance of profits trailing off on a move above 155, but the options market implies only a 5% chance of the stock being high enough on May expiration that this trade loses money on the upside. So basically it’s a stock alternative, with a breakeven of 148, with defined risk of $3 in case the stock drops in line or even more than the implied move. On the upside, it will behave similarly to stock until 155.
Next, let’s look at hedges for those already long the stock. The key here is as little outlay as little possible while giving room for the stock go higher. That asymmetrical risk/reward can be locked in with a put:
Hedge vs 100 shares of AAPL (147.50)
Buy the May5th weekly 142 put for .60
Breakeven on Friday: Gains and losses in the stock but below 142 hedged 1 to 1.
Rationale – The most likely scenario here is losing .60 while hopefully riding the stock higher. However, if the stock does decline, protection kicks right near the implied move on the downside and protects against any more losses below.
The last trade idea to look at is also for stockholders, and this is one that offers zero cost leverage:
leverage vs long stock
vs 100 shares of AAPL 147.50 buy the May5th weekly 152.5/155 1×2 call spread for even money
- Buy 1 May5th 152.50 call .80
- Sell 2 May5th 155 calls at .40
Breakeven on Friday: Nothing done if the stock is 152.50 or lower, but above that level up to 2.50 in additional profits up to 155. Above 155 the stock is called away but at an effective sale price of 157.50, $10 higher.
Rationale – This is an easy way to add leverage to a position, an upside move in line with the implied will have additional profits. The chances of being called away in the stock are low. For those that feel like an effective sale price to sell stock of 157.50 is still to tight, this same trade can be done for even as the 155/157.50 1×2. That has less probability of success and less chance of being called away at all.
ESTIMATES & FORECASTS FROM BLOOMBERG:
2Q EPS est. $2.02 (range $1.91 to $2.14)
2Q rev. est. $53.1b (range $51.7b to $54.7b); forecast on Jan. 31 of $51.5b-$53.5b
2Q gross margin est. 38.7%; forecast 38%-39%
3Q rev. est. $45.7b
3Q gross margin est. 38.3%
2Q unit est. 51.4m (5 estimates compiled by Bloomberg News)
2Q ASP est. $666 (5 estimates)
3Q unit est. 42.0m (3 estimates)
3Q ASP est. $629 (3 estimates)