We're still in the early innings of earnings season, but thus far the handful of Apple ( AAPL) related names which have reported provided solid numbers for the market to consider. Then again, the market reaction to strong numbers from Skyworks Solutions ( SWKS) has not been so positive for the stock. Shares traded up a few percentage points in the after-hours on Thursday but reversed hard Friday morning.
Gaming Apple's reaction can be tough in that many folks have an emotional connection to the stock. They either love the products and use them religiously or avoid Apple like the plague. That can often bleed into a preconceived opinion on its valuation. If I were trading this one into the earnings numbers, I would simply use the last two years as a guide.
How has the market reacted recently to Apple reports? Forget about what happened 10 or 15 years ago. Heck, forget above five years ago. Apple is different today. The company will report earnings on July 31.
Over the past nine reports, Apple has moved an average of 4.15% the first trading day after it reports. This is measured on a closing basis. In the group, there was one outlier, which was a day when Apple remained virtually unchanged. Lifting that single report out increases the average move to 4.6%. This matches the current option pricing for the August 3 expiration, the closest expiration to the company's report on July 31.
If we expand our view to three weeks (21 days) post-earnings, we find Apple has closed higher eight of the past nine reports. This compares to only five higher closes the first day after the report. The average move is 7.15% with a 6.5% or more move occurring two-thirds of the time. The smallest moves fell into the 3-4% range. The current August 24 straddles (roughly 21 days post-earnings) are only pricing 5.75%, so there may be some value here. An upside at-the-money call only play clocks in at under 3% to breakeven.
Unfortunately, I feel we're too far out from earnings to implement a play now as my thesis would draw around the idea of diagonal call spreads or calendar spreads. That being said, I have the outline of two trades I will consider placing during the day Apple reports after the bell.
The first idea would consist of buying an August 24 call that is 4% out-of-the-month and selling an August 3 call that is 6% out-of-the-money. For instance, if I were placing this today it would consist of buying the August 24 $200 call and shorting the August 3 $202.50 for a net cost currently around $1.30.
The other idea would be a calendar spread that would including buying an August 24 strangle that is 5% out-of-the-money and shorting an August 3 strangle with the same strikes. For instance, today it would consider of buying an August 24 $202.50 call and August 24 $182.50 while simultaneously shorting an August 3rd $202.50 call and August 3 $182.50 put. The net cost here currently runs around $1.60.
I'm more hesitant of a directionally only play, but either offers a defined risk with potentially unlimited upside should Apple trade below the short positions through August 3. Also, if Apple did not move beyond 3-4%, one could opt to close the short leg(s) early to open up the potential for big upside.
We'll see how shares shake out into earnings, but this will likely be my earnings day approach.
