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Apple (AAPL) is due to announce earnings on January 22, 2013 (although this is currently unconfirmed). A year ago they announced earnings on Tuesday, January 24, 2012 just after the monthly options expired. The January 22, 2013 date would be consistent with that pattern. Of course, this is the big quarter when iPhone 5 and the iPad Mini results will be known for the first time.

A year ago the market responded favorably to the announcement and the stock moved $26 higher on the news (and then continued to move up more slowly for several months).

Who knows what will happen this time around? A favorable compelling argument was made last week by a Seeking Alpha writer - Apple Is A Buy Before Earnings, but who really knows what will happen? The last two announcements were disappointing, and contributed to the recent implosion of the stock.

I personally believe the stock should be trading at least $30 higher than it is right now by the middle of January, but that is only a hunch from an Apple bull. I admit that I really have no idea. So the option play I suggest should cover a wide range of possible reactions to the announcement.

An interesting investment might be to buy calendar spreads at a variety of strike prices (centered around your best bet as to where the stock will be in the middle of January). If you bought February options and sold the January series, your current cost would be the middle column in this table:

 

Weekly

Cost of

Time Premium of

 

Option

Feb-Jan 13

Option w/3

 

Price*

Calendar

Weeks of Life

At-The-Money

11.00

11.00

17.00

+/- $5

9.00

11.15

14.00

+/- $10

7.00

10.85

12.00

+/- $15

5.00

10.80

10.00

+/- $20

3.50

10.70

8.50

+/- $25

2.50

10.30

7.00

    

*With one week of remaining life expiring just after
the earnings announcement based on January 2012 prices.

I prefer to use puts for calendar spreads at strikes below the stock price and calls for spreads at strikes above the stock price, but your choice of puts or calls is largely irrelevant for calendar spreads - the strike price is the important consideration. However, bid-ask ranges tend to be smaller (i.e., better prices are available) when the options are out of the money rather than deep in the money, and doing it this way results in fewer deep in-the-money options to roll out of.

It is a little unusual for calendar spreads to cost about the same regardless of how far away from the stock price the strikes are - usually the at-the-money spreads cost quite a bit more than those well away from the money. There is so much uncertainty in the expected price of Apple, however, that a strike 20 points away from the stock price is deemed just about as likely to be hit as an at-the-money strike.

If you bought the Jan-Feb calendar spread for about $11.00 and waited for the January options to expire, you could sell the Weeklies with one week of remaining life expiring just after the earnings announcement and you would get the approximate prices in the first column above (based on Weekly prices for January 2012 options expiring just after the announcement). Usually, these Weekly options trade for considerably more than they would in a non-announcement week.

For example, best case scenario, your calendar spread is right at the money when the January options expire. Your short Jan-13 monthly expires worthless and you sell the Weekly with 7 days of remaining life for $11, or just about what you paid for the one-month calendar spread in the first place. If the stock price remains the same after the announcement, you would have all your money back and still have a February option with three weeks of remaining life (worth about $17 for more than a 150% return on your investment for that spread).

You have two shots (more if you choose to continue selling new Weeklies) to take in cash on your original $1100 investment - once when you sell the Weeklies which expire just after the earnings announcement, and the other when you sell the February options with three weeks of remaining life. You could never lose your entire original investment because there will always be some value for an AAPL option with three weeks of remaining life, no matter how far away from the stock price it might be.

Buying these calendar spreads at several different strike prices will increase the odds of having at least one or two spreads being a big winner.

If the stock is trading $15 away from the strike of your calendar when the January options expire, you will get about $5 of your $11 calendar cost back and still have 3 weeks of remaining life between the long and short options. This spread should make a gain as long as the stock ends up within $25 of the strike price after the announcement.

The odds of a successful trade here seem attractive. The big challenge is trying to guess where the stock might be trading on January 18 (and again, on the 25th when the Weeklies expire). As long as your strike is in the ball park of the prices at that time you should make some good gains on your basket of calendar spreads.

Source: The Perfect Options Play For The Apple Earnings Announcement?