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During earnings season, I will go through each and every stock that is scheduled to report for each week and make my decisions based on a number of factors:

  • profitability
  • probability
  • and initial cost

While this can be a very time consuming process, I have found that every now and then a trade that I have been working on for the best possible chance at succeeding makes complete sense even though I may not have previously given consideration to it beforehand. This is the case with Apple Inc. (NASDAQ:AAPL).

I am always looking for profitable trades based on realistic scenarios. As I was looking into Apple's past earnings numbers and how the stock moved afterward, I came upon this trade by moving around the strike prices. The key to this trade is the details, so you must understand how this trade will work. To add to this, I highly recommend that you close this position on Wednesday, the day after Apple reports after the market closes on Tuesday.

This trade is going to take a lot of explaining. In my opinion, I would make the trade on Tuesday, before the market closes, so you get a handle on where the stock price will be trading at. Apple is known to have wild fluctuation before releasing their earnings, and I see this earnings call as being no different.

I will be posting two profit/loss charts here, as you will need to understand what the maximum gain or loss is if you hold this trade until expiration and what whet maximum gain or loss is if you sell early, which I fully intend on doing.

The strategy I will be using is a 'long put butterfly' spread, but with some major adjusting of the strike prices. The 'long put butterfly' spread is a limited profit and limited risk strategy. This means that you know what your potential gain or loss is going into the trade.

Here is a look at how to properly place this trade. (Note: I am using the minimal amount of contracts needed for explanation purposes):

Long Put Butterfly Construction

  • Buy 1 OTM Put
  • Sell 2 ATM Puts
  • Buy 1 ITM Put

Under most circumstances, the general idea of this strategy is to keep the strike prices relatively close, but this is not how I will be trading Apple's earnings. The premise of the strategy is to have little volatility. However, when you see what I am constructing with this specific trade, I think you will definitely like the risk/reward with this trade.

Currently, Apple is trading at $420.30/share. The 52-week range is $310.50 - $431.37.

52wk high:431.369
52wk low:310.50
EPS:27.68
PE:15.20
Div Rate:N/A
Yield:N/A
Market Cap:391.78 B
Volume:14.78 M

You may be wondering why would I want to make an Apple earnings trade that uses a strategy where less volatility is better? The reason is that I do not expect Apple's price-per-share to move almost $25.00 (up or down) by Wednesday, which is the day after Apple reports earnings. These are the two break-even points on this trade. This is why I really like this trade and I fully expect to be able to close the position by Wednesday.

The strike prices chosen are obviously critical to the success of this trade. Currently, I will be placing the following trade:

  • Buy (10) AAPL January Week 4 $375.00 put options
  • Sell (20) AAPL January Week 4 $420.00 put options
  • Buy (10) AAPL January Week 4 $465.00 put options

The current bid/ask spread is $19.72 - $20.60. A limit order of $20.20 should get your order filled. If the stock price should change, it will be very easy for you to simply adjust the strike prices, as they are in $5.00 increments on the weekly options. I am playing this trade aggressively. You can always adjust the number of contracts to suit your own preference.

As I mentioned earlier in this article, there are two ways you can look at the profit/loss chart: the first one will be if you choose to close the trade on Wednesday and the second will be if you would wait until Friday to achieve full value. Again, I highly recommend closing this trade early, so I will use the Wednesday profit/loss chart first:

Profit/Loss Chart (if sold on Wednesday): Current Price: $420.30

PriceProfit/Loss
$281.25(-20,150.00)
$323.67(-20,150.00)
$347.92(-20,150.00)
$395.15$27.00
$399.43$4,189.00
$408.52$12,147.00
$420.64$16,804.00
$429.73$13,301.00
$435.80$8,502.00
$441.86$2,922.00
$444.92$0.00
$447.92(-2,813.00)
$453.98(-8,225.00)
$505.49(-20,150.00)

Profit/Loss Chart (if held until expiration - Friday) - Current Price: $420.30

PriceProfit Loss
$281.25(-20,150.00)
$323.67(-20,150.00)
$347.92(-20,150.00)
$395.150.00
$399.43$4,282.00
$408.52$13,373.00
$420.64$24,206.00
$429.73$15,115.00
$435.80$9,055.00
$441.86$2,994.00
$444.92$0.00
$447.92(-3,067.00)
$453.98(-9,127.00)
$505.49(-20,150.00)

It is one thing to show a profit and loss chart detailing where a stock needs to be at in order to profit, but there has to be some information showing how a stock has moved previously after reporting earnings. This is how Apple has traded over the last four quarters:

On October 18, 2011, Apple reported their fourth-quarter earnings. The stock saw the following price move:

DateOpenHighLowCloseVolume
Oct 21, 2011398.10399.14390.75392.8722,187,216
Oct 20, 2011400.00400.35394.21395.3119,626,042
Oct 19, 2011401.35408.42397.80398.6239,428,299
Oct 18, 2011421.76424.81415.99398.6231,485,728
Oct 17, 2011421.74426.70415.94419.9924,501,528

On July 19, 2011, Apple reported their third-quarter earnings. The stock saw the following price move:

DateOpenHighLowCloseVolume
Jul 22, 2011388.32395.05387.75393.3018,454,555
Jul 21, 2011386.95390.06383.90387.2918,804,148
Jul 20, 2011396.12396.27386.00386.9033,618,816
Jul 19, 2011378.00378.65373.32376.8529,255,192
Jul 18, 2011365.43374.65365.28373.8020,451,089

On April 20, 2011, Apple reported their second-quarter earnings. The stock saw the following price move:

DateOpenHighLowCloseVolume
Apr 21, 2011355.00355.13348.52350.7026,921,800
Apr 20, 2011343.51345.75341.50342.4125,023,406
Apr 19, 2011333.10337.98331.71337.8614,977,749
Apr 18, 2011326.10332.23320.16331.8521,782,061

On January 18, 2011, Apple reported their first-quarter earnings. The stock saw the following price move:

DateOpenHighLowCloseVolume
Jan 21, 2011333.77334.88326.63326.7226,942,816
Jan 20, 2011336.43338.30330.12332.6827,313,899
Jan 19, 2011348.35348.60336.88338.8440,557,457
Jan 18, 2011329.52344.76326.00340.6567,178,100
Jan 14, 2011345.89348.48344.44348.4811,030,000
Jan 13, 2011345.16346.64343.85345.6810,648,026

There are a few things noteworthy here. Because the goal of this trade is to close the position on the Wednesday following Tuesday's earnings release after the market closes, the pattern over the last four quarters shows that the trade I am executing now would have been profitable every single time. Even last quarter, when Apple made a bigger price move than normal, the stock at one point was definitely in range to sell for a gain the next day.

Am I expecting Apple to remain stagnant after earnings? Absolutely not. What I do expect is that Apple will move about $12.00, up or down. If this is a realistic scenario, then this trade will be a huge success.

To mention what you should do if Apple was trade at $430.00/share or $410.00/share right before they release earnings, I recommend changing the strike prices to fit this trade. For example, if Apple is trades up to $430.00/share at noon on Tuesday, I would use the following strike prices: Buy $385 put/Sell $430 puts/Buy $475 Put. Conversely, if Apple is trading at $410.00/share at noon on Tuesday, I would use these strikes: 365 Put/$410 Puts/$$455 Put. Make sure you have the correct format in terms of contracts for each "leg" of the trade.

Remember, the goal here is to close this position quickly and make a profit. Please do not be greedy and hold. The tides can always change. If you have any questions about this trade or any of my other articles, please leave a comment or send me an-email. Thanks.

Disclosure: I am long AAPL.

Source: A Very Intriguing Apple Earnings Trade To Place Tuesday Based On Past History