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Apples Earnings Play Idea

|Includes: Apple Inc. (AAPL)

Everyone who knows the stock market knows AAPL and what it is capable of in earnings season. The question that arises is what is the best play on AAPL before the earnings release on 10/25 at 5PM. Apple has was on a bull run from last earnings season which started around 580 and made it all the way up to 705. I believe this was a bull run largely to do with the hype of the Iphone 5 and continuing QE in the markets.

So with earnings tomorrow what is the right play on the stock? With Apple I always like to play earnings with options which are slightly out of the money. Apple has been known in the past to swing 5-10% either way depending on earnings. At the close of the markets today Apple was at 616.83 a 5% swing which is conservative would put Apple at 647.67 or 586.06 during Fridays trading session. Apple missed EPS last quarter which was 10.37 consensus with an actual EPS of 9.32. This quarter the estimate for Apple is a mere 8.85. Many people were disappointed with sales of the Iphone 5 at 5 million units when it was released. We have to remember a simple Production Possibility Curve or PPF from simple economics. A company that puts out the most products it possibly can from its locations is working to its full efficiency. Althought many are unhappy with the number we must remember Apple claims it could not produce more then the 5 million Iphones that were sold out in the first days.

Some things to remember

  • Apple sold 5 million Iphones on the day of the new release.
  • Earnings Estimates are down over a 1.50 from last quarter.
  • Last quarters earnings were a main result in Iphones sales underproforming due to the awaited new release.

My predictions on earnings tomorrow are a EPS of 9.15. With the earnings release falling on a Thursday the day before WK4 options end there are some bargins for contracts.

640.00 5.70 +0.45 5.45 5.65 8220 6486
645.00 4.25 +0.34 4.20 4.30 6496 4399
650.00 3.25 +0.34 3.15 3.20 10681 8911
655.00 2.40 +0.30 2.40 2.45 7247 4572
660.00 1.78 +0.32 1.78 1.80 8968

8058

I would recommend playing a Call with a strike of 645 which expires October 26th. If apple releases a positive earnings this contract could easily see a 12.00 value.

Disclosure: I am long AAPL.

Additional disclosure: This is all my opinion. I am not a professional trader.