The Real Guide On How To Play Apple Into And Out Of Earnings

|
 |  About: Apple Inc. (AAPL)
by: David Ristau

Click to enlarge
(Click to enlarge)

Daily Data: Apple Inc. (NASDAQ:AAPL)

Apple is expected to release earnings after the close on Tuesday which is a big and exciting event. Why? Because Apple nearly always beat EPS expectations and keeps their guidance low for the following quarter. They have extremely important market presence, and their earnings will go a long way to taking the market up or down. Below you can see how many times Apple has beat its EPS estimates since the final quarter of 2008. Only once did the stock miss estimates.

Click to enlarge
(Click to enlarge)

Currently, AAPL is expected to grow earnings at a rate of 20.72% over the next 5 years, given that the P/E is 14.73 the stock is 40% undervalued! If earnings are to beat on Tuesday this would further increase the expected annual EPS number making AAPL an even greater value. My theory, based on the data below, is that Apple increases in price next week.

The following data presents AAPL returns from the close of the stock on the day of earnings to the close of 1 day/1week/2weeks after the earnings date.

Example: AAPL closed at $560.28 on Tuesday, April 24, 2011. Apple reported during after hours on the 24th. I have recorded the closing price of AAPL 1 day after the close on expiration which is4/25, as well as for 1week/2weeks after.

AAPL Data from close of earnings day to close 1 day after earnings


(Click to enlarge)

The returns above are quite impressive for a one day move. Apple has closed higher the day after earnings 11 of the 14 past quarters shown. This data alone may encourage you to take a one day hit or miss type trade that would use at-the-money weekly bull put spreads.

AAPL Data from close of earnings day to 1 week after earnings


(Click to enlarge)

We will be watching AAPL weekly bull put spreads both on Monday and Tuesday to see if we will enter any weekly trade off this data (Dollar & Sense may enter as well). The worst returns of -6% for the week after earnings are excellent. Currently the July 27 565/560 weekly bull put spread (which is 6.45% out of the money) is selling for 0.80 which is a 19.04% return if expiring worthless! Note, a weekly trade expiring on July 27 would not be perfectly fit in line with the data presented since weekly options expire on Friday and the data shown above assumes the closing price a week after earnings which would be Tuesday, July 31.

AAPL Data from close of earnings day to 2 weeks after earnings


(Click to enlarge)

Another encouraging list of returns is those on a 2 week time frame. In this case if AAPL were to sell off on Wednesday/Thursday I would be able to use the returns above and gauge where we would want to place weekly bull put spreads for options expiring on August 3.

AAPL earnings for July (past 3 quarters on 1 day, 1week, 2 week time frames)


(Click to enlarge)

How could I resist showing you just the isolated returns for AAPL for July expiration? Above you can see that AAPL has outperformed on every single time frame (1 day/1 week/ 2 weeks) during the July earnings period for the past 3 years! In conclusion I'm bullish AAPL and we'll be looking at many option positions in the stock this week.

Disclosure: I own short calendar/vertical spreads on GLL (I'm short GLL). I'm short SCO, GLL, and UVXY. I'm long AAPL. Charts and fundamental data come from Finviz.com and Tradingeconomics.com