What The Options Market Is Predicting For Apple Earnings

Jul.23.12 | About: Apple Inc. (AAPL)

Apple (AAPL) is easily the most "popular" stock in the market. It has the most subscribers of any stock on Seeking Alpha and the biggest market cap in the world. For that reason, there is a whole lot of chatter about Apple's upcoming earnings report on Tuesday, July 24. I have written two previous articles highlighting options trades around Apple earnings: Profit From Volatility Ahead Of Apple's Earnings and Use Options To Go Long Apple Earnings And Earn 43% Return With Controlled Risk

Widely considered unimportant is the analyst consensus estimate of $10.32 per share. The "Earnings Whisper" is reportedly $11.63 per share. There are many in depth estimates of iPhone sales, iPad sales, and everything in between.

The intelligent investor can use option prices to understand what price movements the option market is predicting for Apple. In my opinion, this is far more valuable and actionable information than any other estimate.

The option trade we will look at is called an at-the-money "straddle," which is the purchase of a call and put at the strike price closest to the current stock price. In theory, the total cost of the call and put is the change in price that the stock can be expected to trade at on the day of expiration. Because Apple reports earnings on Tuesday and the weekly Apple options do not expire until Friday, we must be aware that those extra three days of price movements are also included in the price of the straddle.

With Apple currently trading at $604.30, next week's 605 call is trading at $16.50 and 605 put at $17.35.

  Different of Stock Price & Strike Price Option Price Movement Predicted
AAPL 605 Call $0.70 $16.50 $17.20
AAPL 605 Put ($0.70) $17.35 $16.65
    Total Price Movement $33.85
Click to enlarge

We should take notice of the higher 'Movement Predicted' value for the call than the put. This is because there is higher demand for calls than puts, therefore supporting an increased price. This is consistent with Apple's position in the market: retail investors, who traditionally invest long, are very involved in this stock.

Please note that the option market is making a non-directional prediction; the $33.85 could be up or down. The market is merely predicting the price volatility. The options market is pricing in a $33.85, or 5.60%, move for Apple next week.

Disclosure: I am long AAPL.