Apple (AAPL) reports earnings after market hours today (April 26, 2016). At the time of writing, the stock is barely holding onto support at its 50-day moving average (DMA) almost two weeks after a disastrous breach of 200DMA support.
The current sell-off sets up a great opportunity to play post-earnings upside. April is by far Apple’s most likely month to deliver a post-earnings gain. Moreover, when AAPL trades into earnings – especially April earnings – with a negative bias, the stock also tends to move in reverse the day after earnings. I last updated these data in October, 2015 in “The Apple Pre-Earnings Trade: October, 2015 Edition – An Important Juncture.” (I will update them again in the coming week or so).
The negative bias is clear from the chart above. AAPL’s average daily change over the past 7 calendar days is -0.73% and -0.30% over the past 14 calendar days. The stock had a disastrous breakdown from 200DMA support that quickly ended what was a promising breakout. Even the 50DMA is barely holding as support ahead of earnings (although the GOOD news is that the 50DMA is trending upward). The technical picture is so dire that I could not help but hedge my bets a little bit. Here is my AAPL pre-earnings configuration:
Call spread: May 06 ’16 $107/$110
Put: Apr 29 ’16 $102 Put
5:1 ratio for call spreads to puts
The short end of the call spread was purposely chosen to hit the 200DMA. I am assuming that if AAPL turns things around post-earnings, the 200DMA will cap the run-up in the short-term. Thus, I reduced the cost of the bullish side of my bet by choosing a spread rather than paying the full pre-earnings premium for the May $107 calls.
The put is a simple hedge that will just reduce losses on the call spread in case AAPL really collapses. If AAPL does not lose much, the call spread should also lose little and will even have a chance to recover in the next week and a half.
Be careful out there!
Full disclosure: AAPL positions listed above