An apple all day to keep boredom at bay!

Given the tech bellwether’s publishing of its Q2 results after the close of play today, we thought we’d have an “Apple special” blog on this Tuesday with our own musings here and our resident technical analyst specialist Zak Mir a little later.

First of, bearing in mind that the stock has lost almost $30 this last week going into todays results, and that it plumbed a new 16 month low last Friday at a shade over $385, one has to assert that expectations going into todays figures are low. This is borne out by a steady reduction in analysts expectations over the last several weeks from over $12 a share of EPS to around $10 – see below the progression of consensus analyst estimates from the 1st March to today.

Another intriguing measure to me is that of the embedded volatility in the options pricing. Take a look at the chart below and which has 3 green circles – the former 2 denoting the last time Apple’s vix measure was as elevated and the price at that point. You will see that it put a brake on the stock decline and sparked a 10% rally. My take here is that a similar situation is likely to play out or, if the stock breaks lower to the $350-370 level that unless guidance is truly shocking, that we will put a major low in on the stock and provide a platform to move higher.

It seems that the options market (the “smart” money) is expecting a move of at least 7% tonight – a figure equating to around $30 after the closing bell at 9pm – one of the largest movement expectations in recent quarters… The “reversal” or “skew” is actually on the Put side going into the figures – indicating that traders have been prepared to pay up for downside protection and that the fear element has ratcheted higher going into these figures – as a contrarian then that adds to the bull case. 

We can see in the chart below that the stock price is now down some 44% from its peak of a smidge over $705 reached only in September last year. A natural brake should the guidance from the company (which frankly is what will drive earnings) be poor, is of course the 50% decline level – $350. Will it get there? After hours, volatility can be immense and never say never in the markets as we have been reminded of in recent weeks with the likes of KAZ falling from over 800 to 286p in a little over 3 months!! With a divi yield equating to almost 3% at that level and a cash buffer of nearly 50% of its market cap, then the stock gets really interesting.

If however the guidance by Tim Cook is positive, or there is news of an increased buy back / dividend payment / stock split, then a very sharp rally indeed will likely be triggered – one that could take us at least back to the $450/460 level. 

So, how to play this? My suggestion is that selling the weekly $375 Puts for around $5 and then buying the weekly $405 v $425 call spread for a net cost of $7 is a cracking strategy. The overall cost is $2 and should the stock rally towards the $430 level then the call spread would be worth $20 (if remaining north of $425 at expiry) – nearly 10 times your money. Vice versa, if the results are poor and you wind up buying Apple at $377, odds are that you are within a few dollars of the bottom. Assuming you do not go silly on the position size then if the stock falls below the strike and towards $350, my betting is that going outright long the stock there would prove a shrewd move on a week or two’s view.

Another way to play the results is to take out a pairs trade in Apple of 50% your usual size – long Apple v short the S&P (remembering to get the notional measures equal, for example if you play £1 per point in apple this is equivalent to a £40,000 gross notional posi meaning you must take a £25 per point (whole point) short in the S&P). You can see below just how much the stock has underperformed the S&P this last 4 months and should the worst come to pass then you will mitigate some of your loss on the short S&P posi but if the results are well received then the pairs trade will deliver handsomely. The reason to play half the size is per the options idea above – should the stock price tank towards $350 then you can go outright long for the swing move higher.

Either way, tonights move will be interesting and so good luck to all those with the nerve to play it!

If you’d like to learn more about options or pairs trading then click either of the 2 images below for a free guide.