How to Trade Apple Ahead of Earnings

By Andrew Keene  OCT 25, 2012 2:15 PM

With the amount of short-term downside pressure on the stock, it is unlikely that Apple will get a pop on earnings.


MINYANVILLE ORIGINAL Apple Inc. (NASDAQ:AAPL) will report earnings today after the close. The report comes in the wake of the iPad Mini announcement this past Tuesday. Analysts are expecting Apple to report earnings of $8.84 per share on $36.2 billion in revenue. Both estimates are higher than in the same quarter of last year. In the past five quarters AAPL has beaten earnings estimates three times and missed twice.

On Tuesday the tech giant released the new iPad Mini, a 7.9-inch version of the wildly popular iPad. The tablet will be priced above most of Apple's 7-inch tablet competition, starting at $329. This is higher than the expected $249 price point, causing many to wonder if Apple priced the iPad Mini too high. The tablet's price tops out at $649. Despite the higher-than-expected price point, analysts expect Apple to sell upwards of 5 million iPad Minis this quarter. Concern over cannibalization seems to be well-founded. Analysts are projecting that iPad Mini sales will cut into iPad sales by as much as 20%. AAPL also introduced an improved version of the larger iPad, a new Macbook Pro, and a new iMac.

Analysts are expecting Apple to report strong sales of the iPhone 5 in its conference call, but are concerned that the excitement over the iPad Mini might not be enough to turn the stock around, which is down around 8.8% in the past month. In the past four quarters, AAPL has moved on average 6.3% on earnings.  The stock sold off twice and rallied twice. Currently the stock is trading around $612.50 in a 52-week range of $363.32-$705.07. The options market is implying a 6.5% move in the stock after earnings. With the amount of short term downside pressure on the stock, it is unlikely AAPL will get a pop on earnings.

My Trade: Buying the AAPL Oct 26 (Wkly) 610-580-550 Put Fly for $5.50
Risk: $550 per 1 lot
Reward: $1450 per 1 lot
Breakeven: $604.50, $555.50
Notes: There is a lot of downward pressure on the stock and this trade has a great risk vs reward setup.

No positions in stocks mentioned.