In my latest article I described few ways to play Apple's earnings. I'm currently in the trade #6 (Reverse Iron Condor) with slightly wider strikes. The trade is expected to make money from the IV (Implied Volatility) increase in the next two days before earnings. I also expect the stock to continue being very volatile before earnings which should help the trade.
If you want to trade the earnings event itself, there are few things you need to remember.
As described in my article 'Whatever You Do, Don't Do This Before Apple's Earnings', buying either calls, puts or both (straddle) before Apple's earnings report is, on average, a losing proposition. This might be even more relevant this cycle. Apple's ATM straddle is currently worth about $44, implying almost 8% post-earnings move. That means that even if the stock moves 8% (which would be the largest post-earnings move since January 2008), you would only break even. If the stock moves just 4%, which is about the average move in the last few years, the straddle will lose 50%.
I personally prefer not to play post-earnings. The stock just became too unpredictable. But if you insist, here are few more "cautious" ways to do it.
Non-directional Reverse Iron Condor for at least 5% move
If you think that the stock will move at least 5%, here is how you can play it:
- Sell AAPL April Week4 2012 550.0 put
- Buy AAPL April Week4 2012 545.0 put
- Buy AAPL April Week4 2012 595.0 call
- Sell AAPL April Week4 2012 600.0 call
Based on the closing prices on Friday April 20, 2012, the trade can be done for $3.80 debit. If the stock moves above $600 or below $550 after earnings and stays there till the end of the week, the trade will produce ~30% gain. However, it is important to remember that if the stock moves less, the trade can easily lose 60-80%.
Non-directional Iron Condor for less than 12% move
If you think that the stock will move less than 12%, here is how you can play it:
- Buy AAPL May 2012 500.0 put
- Sell AAPL May 2012 505.0 put
- Sell AAPL May 2012 640.0 call
- Buy AAPL May 2012 645.0 call
I would go with May expiration here to avoid a catastrophic loss if the stock makes a monster move after earnings. With almost 4 weeks still left to May expiration, we might be able to salvage some value from the trade even if the stock moves beyond the short strikes. Based on the closing prices on Friday April 20, 2012, the trade can be done for $1.55 credit. If the stock stays between 505 and 640 by May expiration, the trade will produce a 45% gain. However, it is important to remember that if the stock moves more, the trade can still lose 40-60%.
Directional Calendar Spreads for 5% move
There are many other creative ways to play Apple's earnings. For example, if you are bullish and expect a 5% up move, you can buy the 605 calendar spread:
- Buy AAPL May 600.0 call
- Sell AAPL April Week4 2012 600.0 call
This trade will have pretty wide profit zone, based on the principle "what if I'm wrong".
Similarly, if you expect a 5% decline, you can buy a calendar 5% below the current price:
- Buy AAPL May 545.0 call
- Sell AAPL April Week4 2012 545.0 call
The beauty of those trades is not only the wide profit zone, but also the fact that you are selling the inflated April IV.
In my opinion, those are much better plays than just buying calls or puts. They allow you to take advantage of the inflated IV, make more if you are right and lose less if you are wrong.
As a side note, I was very glad to see OptionPundit becoming a Seeking Alpha contributor. His latest Apple (AAPL) article is full of wisdom and original thoughts. I'm a big fan and a long time follower of OptionPundit. I can say that he had a major impact on my trading style. Many of my trades presented on Seeking Alpha have been inspired by him. His principle has always been "I hope I'm right but what if I'm wrong?" His earnings recommendations always include a disclaimer "assume 100% loss". Unlike many other "pundits", he has earned the privilege to call himself an OptionPundit.
Please trade responsibly. Remember: earnings are unpredictable. Invest only what you can afford to lose. If the stock moves before earnings and you decide to execute one of those trades, please adjust the strikes accordingly.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.