Update – Apple (AAPL) Earnings Trade

by Dan July 31, 2019 9:48 am • Trade Updates

On Friday I previewed Apple’s (AAPL) fiscal Q2 earnings that were out last night and suggested:

Despite the stocks bounce from its June lows and its 32% YTD gains, it’s my sense that expectations are not particularly high and just an ok quarter with optimistic guidance could cause the stock to rally back towards the consolidation level from last Sept/Oct near $220. But the stock has come a long way since early June without much news, and given what appears to be the relative cheapness of options prices into the print, and might be a heightened period of volatility following next week’s Fed meeting as the focus will then turn squarely to trade war progress, defined risk strategies make sense.

If I were inclined to play for a bounce out of earnings next week I might consider merely buying a near the money call:

And I detailed those views and trade idea on CNBC’s Options Action that afternoon:

The quarter last night was better than expected, per Barron’s:

For the quarter, Apple posted revenue of $53.8 billion, up 1% from a year ago, ahead of the Wall Street consensus at $53.3 billion and within Apple’s guidance range of $52.5 billion to $54.5 billion. The modest growth reverses the 5% top-line decline in the March quarter. Profits for the quarter were $2.18 a share, down from $2.34 a share a year ago, but ahead of the Street consensus at $2.09 a share.

And while the results were not blow out, and despite the stock’s strong rally into the print, they were good enough (ex-iPhone) heading into the seasonally strong second half of the year:

Services revenue in the quarter was $11.46 billion, up 12.6% from a year earlier; that is down from 16% growth in the March quarter. The slower growth is likely to prove disappointing to some investors. Meanwhile, iPhone sales were $25.99 billion, down 11.8% from a year ago, a smaller decline than the 17% drop in the previous quarter; that is likely to be considered good news. Sales in Greater China were $9.16 billion, down 4.1% from a year ago, which is a relatively modest decline in the face of ongoing concerns about the continuing trade tensions between the U.S. and China.

So let’s refresh the trade idea from Friday, merely buying a near the money call in August expiration:

This trade idea breaks-even at $214.25, up 3% from the current level, but risks only 2% of the stock price.

With the stock up more than 5.5% as I write, nearing $220, the deep in the money call is now trading like stock, worth about $11.25 for a $7 gain. At this point the risk-reward changes dramatically, especially given this afternoon’s potentially market-moving catalyst in the Fed’s first rate cut in ten years. No matter who you ask you will likely get a different opinion on how the broad market reacts to a quarter or half-point rate cut. Some market participants see an insurance cut, a sort of one and done (either 25 or 50 bps) as fuel to an already ripping stock market, while others see it as the start of a cycle to combat what might be weakening financial conditions around the globe that will not be friendly to risk assets like stocks. I have no idea what happens, but with a trade like this for an event like earnings in a single stock, it might make sense to book the profit and move on. There are a few options though, close the whole position, sell half and let the other half ride or sell and roll some of the profits out to a higher strike call or call spread, possibly to a longer-dated expiration playing for new highs, risking less than the current premium in the trade.

Action: Sell to Close AAPL ($220) August 210 call at $11.25 for a $7 profit