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By: John J. Critchley, Jr.

The juggernaut has stalled. Apple (NASDAQ:AAPL) has suffered a tough month since the much anticipated launch of the iPhone 5 in mid September. With AAPL giving back some of yesterday's gains and trading lower today by nearly 1 %, the tech darling is down over 11% from a Mid-September high of $705.07.

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Will this downside swoon continue post-earnings? Will sentiment emerge that the recent bout with selling was overdone? There are two events this week that may add some fuel to a potential rebound in AAPL shares. There is the widely expected introduction of the much anticipated iPad-Mini on Tuesday October 23, 2012. AAPL is holding an event with the tease line of "a little more to show you." Most analysts consider this to be a not so subtle hint that this will be the rumored "iPad mini," a trimmed down version of the wildly popular iPad. (Click here)

It is not uncommon for AAPL to trade higher into a major product launch, but the month long selloff leading up to this announcement has been dumbfounding to many AAPL observers. The old trading adage of "buy the rumor, sell the news" has been largely turned upside down.

Also on the docket this week for AAPL and certainly as eagerly anticipated as the iPad min announcement is the FY12Q4 quarter earnings release due on Thursday October 25th after the close. The consensus estimate has AAPL earning $8.93 in the most recent quarter.

Earnings shortfalls in other tech stalwarts - IBM, GOOG and MSFT - must surely make even the most strident AAPL bull a touch nervous going into the Thursday earnings release.

AAPL's reputation for blowing away even the highest expectations was dented by the latest earnings miss in July. However, if we examine AAPL's past history with earnings reports there is still compelling past precedents to believe that Thursday's release will be a bullish one. The technology powerhouse does not often report earnings that come in under the street estimates. Out of the last 7 earnings reports, there were only two misses - the aforementioned July miss and a miss on 10/18/2011.

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Source: Livevol(NYSE:R) Pro (

However, is how AAPL responds after reporting earnings that is most paramount. In this aspect, Apple has a mixed record over the past 5 earnings reports. The shares have gone higher the following day in three of the past five earnings releases, with the underlying moving (non-directionally) an average of around 5.72%.

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The analyst community continues to be smitten with Apple. There are 54 analysts that follow Apple and out of these, 48 rate AAPL a Buy/Outperform, 4 have it as a hold and only 2 brave souls rate AAPL a sell.

Options Play

What makes playing AAPL's earnings quite tricky from a directional point of view is that the company has a history of nearly always beating the street estimates, but not always rising post-earnings.

Confused on what to do with the earnings? Long or short? How about playing both ways? We present an option play for those inclined to believe that AAPL will have an outsized move, but aren't sure which way it will go and do not want to pay too much premium on this speculative bet.

With AAPL trading over 11% off it's all time highs, the implied volatility of the options is quite a distance from its 52 week highs. The 30 day implied volatility is trading around 37.91%, less from the 52 week implied volatility high of 46.44 % hit in April of this year.

Let's take advantage of these reasonable implied volatilities to initiate a position that takes advantage of any post-earnings move in the underlying in either direction.

If you believe this scenario may play out, let's buy a strangle.

This is not a specific trade recommendation, but a trade analysis.

Trade idea #1-A Long Options Premium Play

To find a pure earnings option play, one could go out to the October 26th 2012 weekly options, which present some interesting short term value.

The play:

a) Buy October 2012 weekly 600 put/655 call strangle for $14.30. The implied volatility of this strangle is seemingly quite high at approximately 55.4% IV (Implied Volatility). This IV reading is, however misleading because the most important determinant of an options real value as it gets closer to expiration is the premium only, not the actual IV% reading. The premium over parity (POP) number of $14.30 is what is really important in this case.

Net debit: $14.30.

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Why the October 2012 weekly 600 put/655 call strangle? The answer is threefold:

1) The At-the-Money (ATM) 630 straddle is trading for $36.50 the breakevens for this straddle in the underlying are $593.50 and $666.50 respectively. These breakeven points represent a 5.7% move in the underlying. This percentage is exactly in line with the average post earnings move in AAPL and seems very fairly priced. Not much of a bargain.

2) If we look at the 30 Day Implied Volatility calculation in AAPL options over the last 7 earnings periods, we see that the current 30 Day IV calculation of 35.23% is higher than the other readings in 5 out of the 7 past earnings periods. This rules out buying any premium and making a straight volatility play in options in the further out months (November expiration, for example).

(click to enlarge)

Source: Livevol(R) Pro (

3) The October 2012 weekly 600 puts/655 calls strangle is priced at $14.30, making the breakeven points in this strangle, $585.70 and $669.30 respectively. These breakeven points do represent a slightly greater move in the underlying ($8 on the downside and $3 on the upside) than buying the ATM (AT-the-Money) straddle, but has the advantage of costing less in pure premium. This lessens the potential total loss in the unexpected case that the AAPL underlying has a muted response to the Ipad-Mini announcement and earnings.

Risk: The earnings report does not cause the expected movement in the underlying. Be forewarned. You may lose the entire premium. This play is for speculative monies only.

Stay tuned.

Note: The Prices are quoted at time of submission and do not reflect current market prices.


We are not liable for any trading decisions made by any reader. NO advice is given or implied. The information offered in this article is for demonstration purposes ONLY and should not to be either construed as an offer or considered to be a recommendation to buy or sell any options.

Your use of this information is entirely at your own risk. It is your sole responsibility to evaluate the accuracy, completeness and usefulness of the information. You must assess the risk of any trade with a professional broker, or financial planner, and make your own independent decisions regarding any trades mentioned herein. This is not a solicitation to buy or sell any options, or to purchase or sell any credit spreads. Trading options only carries a high degree of risk, is not suitable for all traders/investors, and you may lose all of your premium money invested in the options. If you have never traded options before, we strongly recommend that you read a little background information made available by the government. Only you can determine what level of risk is appropriate for you. Also, prior to buying or selling an option, a person must receive a copy of Characteristics and Risks of Standardized Options.

Past performances DO NOT guarantee future results. Please consult with your own independent tax, business and financial advisors with respect to any trade. We will NOT be responsible for the consequences of anyone acting on this purely demonstration material.

Important Note: Options involve risk and are not suitable for all investors. For more information, please read the Characteristics and Risks of Standardized Options.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.