Apple (AAPL) will get all the eyes tonight. Concerns regarding the impact of the coronavirus will take center stage although I don't know how much the company can comment on potential impact with any certainty as of yet. I almost feel like the same can be said regarding 5G. That means the likely two biggest impacts will be inferred, possibly discussed, but done with little certainty.
Suppliers have already warned of uncertainties in the supply chain. Ironically, they are discussing increases in production surrounding the iPhone. We aren't yet in an upgrade cycle, so I believe if we are to have a period of lull or supply issues, now is probably the best of a bad situation. A potential pandemic is not what the top smartphone player wants to see in the midst of a potential 5G upgrade cycle. Tonight's report should focus on wearables and services as well as some early comments on Apple TV+. It will be intriguing to see what kind of costs the company will incur for creating original content, and how consumers are receiving it.
After a slow start to the morning, buyers are hitting the tape boosting shares 2% on the day. We're seeing some optimism into the report. The stock has closed green the day after reporting four straight times and six of the past seven reports, so I understand chasing a trend. Volatility may be on the top of traders' minds, but history doesn't support it. The stock has a move around 5.7% priced into it for this week. While Apple has experienced four closing moves greater than 5.7% over the past three years, it has yet to close above 7%. In fact, the post-earnings intraday maximum moves maxed out at 7.5% over the past three years. We've seen better moves from the open to the close than we've seen from the pre-earnings close to post-earnings close in terms of consistency.
My view here is a diagonal calendar spread may be the better approach. Look to get long next week's volatility and offset the cost my shorting this week's volatility. This won't do well if the stock remains flat, and the profits will be somewhat muted if we get a huge move, but if positioned right, even a huge move could be profitable.
The trade approach I would consider is buying a 3% out-of-the-money strangle that expires on February 7th, and shorting a 6% out-of-the-money strangle that expires on January 31st. There's some rounding involved, but I would keep the distance from the stock and distance between the strikes the same. Currently, that would be around $9.50 away from price and $7.50 between the long and short strike.