Apple (AAPL) FQ4 Earnings Preview / Trade Ideas

by Dan October 29, 2020 12:32 pm • MorningWord• Trade Ideas
AAPL will report fiscal Q4 results today after the close. The options market is implying about a 4.6% move in either direction tomorrow, or about $5.30. With the stock very near $115 the Oct 30th straddle (the at the money call and put premium are equal to $5.30) if you bought that, and thus the implied move you would need a rally above $120.30 or a decline below $109.70 to make money on tomorrow’s close.
Shares of AAPL are up 56% on the year, up 115% from their March lows and down 18% from its all-time high made on Sept 2nd and down about 9% from its most recent high on Oct 12th. This might be one of the most interesting charts in the entire stock market in my opinion. Take a ruler and draw a line from the March lows and connect the July low, the Sept lows, and yesterday’s brief break. What’s also fascinating is the very well defined 10% decline from the Oct 12 high, with today’s bounce back above the longer-term uptrend but still below the short-term downtrend. X marks the sport, this stock is gonna either rip and fall out of bed tomorrow in my opinion, there is just too much tension building.

Unlike AMZN, Wall Street analysts have cooled a bit on AAPL stock with 27 Buy ratings, 13 Holds, and Sells with an average 12-month price target of around $122, or about 5% from where the stock is trading.

So what’s the Trade?

If I were inclined to play for a beat and raise and a move back towards the prior highs by year-end near $138 I might consider a call spread, for instance:

Bullish Trade Idea: AAPL ($115) Buy Dec 115 – 135 Call spread for $5.75

-Buy to open 1 Dec 115 call for $7.25

-Sell to open 1 Dec 135 call at $1.50

Break-even on Dec Expiration:

Profits of up to 14.25 between 120.75 and 135 with max gain above 135

Losses of up to 5.75 between 115 and 120.75 with max loss of 5.75 below 115

Rationale: this trade idea risks about 5.5% of the stock price, has a break-even up 5.75%, and has a max gain of 10% of the stock price if the stock is just below its Sept 2 highs in about 7 weeks.

 

Or for those who think the stock will RIP tomorrow and make-up the last two week’s losses in one fell swoop then if the one day move is priced at 4.6%, then at the money call (or put if bearish) would only cost you half that in dollar terms that is $2.65 which feels dollar cheap for those with conviction on a one-day move tomorrow, But I’ll offer my usual disclaimer for long premium directional trades into events like earnings, and especially with weeklies, you need to get a lot of things right to merely break-even, first and foremost direction, then magnitude of the stock move and of course timing.

 

But the company put up a massive quarter in FQ3 and guidance was aggressive and might be difficult to outperform I would also add that the staggered release of the low-end iPhone SE in Sept, the recent release of the iPhone 12 pro and 12 in Oct and the expected release of the iPhone 12. mini and 12 Pro Max in mid-Nov could add some odd lumpiness to their units, possibly more back-ended loaded in the current quarter making it tougher to guide for the quarter.

If I were inclined to play for a breakdown of the March uptrend I might consider a move back towards $100, the July gap level, and define my risk with a put spread in Nov expiration, for instance:

Bearish Trade Idea; AAPL ($115) Buy Nov 115 – 95 put spread for $5

-Buy to open 1 Nov 115 put for $5,70

-Sell to open 1 Nov 95 put at 70 cents

Break-even on Nov Expiration:

Profits of up to 15 between 110 and 95 with max gain of 15 below 95

Losses of up to 5 between 115 and 110 with max loss of 5 above 115

Rationale: this trade idea risks about 4.4% of the stock price, has a break-even down 4.4%, and has a max gain of 13% of the stock price if the stock is back where it was trading the day of its Q3 earnings report in late July.

LASTLY…

Yesterday after the open I filmed my weekly In The Money segment with Fidelity Investments where I detailed a collar hedge for longs, watch by click below and see my notes below the video:

Long holders who do not want to sell their stock, but are more worried about downside associated with their earnings/guidance and post-election volatility should consider collars, selling 1 out of the money call (per 100 shares long), and using the proceeds of that sale to help finance the purchase of a downside put, essentially limiting potential upside in the sock between now and the chosen expiration to the short call strike, but also limiting losses in the stock down to the long put strike, for instance:

vs 100 shares of AAPL long at $114 – Buy Dec 100 – 130 Collar for Even Money

-Sell to open 1 Dec 130 call at $2.30

-Buy to open 1 Dec 100 put for $2.30

Break-even on Dec expiration:

Profits of the stock up to 130, if the stock is 130 or higher on Dec expiration the investor’s stock would be called away, but the investors can always buy to cover the short call to keep the long stock position intact.

Losses of the stock down to 100, protected below. if the stock is at or below 100 on Dec expiration the investor will need to make a decision whether they want their stock to cover the long put, so again will need to make a decision whether they want to stay long.

Rationale: an investor would collar their stock into an event like earnings, or into a period of uncertainty like the post-election days/weeks if they have gains they want to protect down to a certain point and they are more willing to give up potential gains in place of having defined risk to the downside.