Apple Pre-Earnings Trade: The Case for A Bullish Position

Last week, I made a bullish case for trading ahead of earnings for Apple (AAPL). My calendar call spread hit its initial profit target and left behind the put spread and a search for a new strategy. Last Friday, CNBC Options Action presented its own bullish case for Apple’s earnings, but I did not like the proposal to buy a call option outright.

My assessment of AAPL’s earnings trading history suggests options are well-priced to over-priced, so I am more inclined to make my bullish trade by selling some premium back to the market. I prefer an August $210/$215 call spread or a new calendar call spread at the $215 strike (August 2 / August 16).

Since 2007, AAPL has delivered 50 earnings reports and 22 since 2014. Since 2007, AAPL generated +/- 4.5% one-day post-earnings moves 25 times (50%) and 12 times (55%) since 2014. AAPL closed today at $209.80, and the options market has priced in a +/- 4.3% move at the end of this week. The frequency perspective makes the options look well-priced. The median or average perspective, where the median move is about +/- 2.7% and the average move is about +/-1.1%, makes the options look expensive using a balance of risk/reward.

The multi-day average price changes are on-track to support a bullish trade. The 6-day average price change for AAPL is 0.6%, and the 13-day average price change for AAPL is 0.3%. It will take a deeply negative day on Tuesday to reverse the direction of those averages: -3.4% sends the 7-day average to 0% and -3.2% sends the 14-day average to 0%. So, assuming AAPL is headed for a positive average for both the 7-day and 14-day price change averages, I will defer to the more consistent 14-day positive correlation and go long.

Tuesday’s performance is even more important for the 1-day correlation. Per the historical pattern, AAPL has an inverse correlation to the close just ahead of earnings. So if AAPL is headed for a gain, say at least 0.5% which should be above “noise” level, then I will likely avoid making an additional trade on earnings.

Apple (AAPL) looks like it is itching to jump higher after earnings...
Apple (AAPL) looks like it is itching to jump higher after earnings…

Be careful out there!

Full disclosure: long AAPL put spread

2 thoughts on “Apple Pre-Earnings Trade: The Case for A Bullish Position

  1. Addendum – if not for my AAPL put spread hedge, I would have been fine just selling a 195/190 or 200/195 put spread short as the complete play on earnings. At the time of the hedge, I was thinking through worst case scenarios. NOW, I am not so concerned about the worst case scenario. Let’s see what happens next…!

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