After the market closed on Thursday, Google (GOOG) reported earnings. It was a major disappointment (the stock is getting clobbered after hours), with the company missing on earnings-per-share and revenue.
On Tuesday, after the market closes, Apple (AAPL) is the next technology powerhouse scheduled to report earnings. There is a general misunderstanding that Apple makes very large price moves after reporting earnings, but this is not really the case. I do not recommend placing a "straddle" or "strangle" trade.
Currently, Apple is trading at $427.75. The 52-week range is $310.50 - $429.47.
|Market Cap:||398.73 B|
What I think is important to understand with this upcoming earnings release is that Apple has a tendency to "lowball" future estimates. From a business standpoint, this is actually a savvy move. For a trader, it can present a nightmare scenario, as the stock may move down or up only slightly. Since Apple is a stock that is over $420/share at this writing, even a slight price move can still present a great trading opportunity if the strategy used is the correct one.
I am very bullish on Apple for 2012. I think the stock will surpass $500/share at some point. However, this is an earnings trade and to anyone who has not read any of my previous articles on earnings trades, I always use a neutral strategy than can profit no matter if the stock moves up or down.
The "reverse iron condor" spread is a neutral options strategy that is placed with a net debit instead of a net credit to the buyer, and can be placed with a lower level trading account. Most brokers will let you place this trade if you are approved with a Level 2 or Level 3. Please check with your broker, and if not approved, you can request to be upgraded.
This trade is a limited risk, limited profit strategy. Here is how the "reverse iron condor" trade is placed accurately. (Note: this example is using only one contract each for explanation purposes):
- Buy 1 OTM Put
- Sell 1 OTM Put (Lower Strike)
- Buy 1 OTM Call
- Sell 1 OTM Call (Higher Strike)
Here is how I will be placing this Apple trade. The "reverse iron condor" has four legs. (Note: you can increase or decrease the number of contracts to suit your preferred investment in the trade):
- Buy (10) AAPL January Week 4 $425.00 strike put options
- Sell (10) AAPL January Week 4 $420.00 strike put options
- Buy (10) AAPL January Week 4 $430.00 strike call options
- Sell (10) AAPL January Week 4 $435.00 strike call options
The current bid/ask spread is $4.00 - $4.60. A limit order of $4.30 should get your order filled.
Current Price: $427.75
The highest profit potential is 16.2% should Apple rise over $435.00/share at expiration or fall below $420.00/share. The two break-even prices are $420.70/share and $434.30/share. When adding in the commission costs to the trade, the profit will still stand at 13.9%, and I am going on the higher end of commission costs to be fair.
This is the only type of trade I would place with Apple's earnings release. Other strategies present too much risk and are one-sided, which is technically gambling when trading earnings.
I will have more articles for earnings trades next week. If you have any questions, please leave a comment or send me an e-mail. I usually respond as soon as possible.