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Three Apple Trades You Can Make Today

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Andrew Keene, who has been the world's largest Apple trader for years, breaks down possible option trades to capture stock moves tied to the company's earnings announcement.

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MINYANVILLE ORIGINAL On Tuesday, July 24, Apple (AAPL) is expected to announce earnings of $10.37, compared with $7.79 a year ago, and revenue around $37 billion.

In my six years of trading Apple, I have only seen the stock sell-off on earnings twice. However, 67% of the time on the day after earnings, Apple closes lower from the opening print, due to the fact that most traders and investors are long the stock. Looking closer at Apple's earnings, it is important to review Apple's key developments this quarter:

In Asia, the new iPad was released in select countries, and most recently, China. However, given the recent launch, Chinese iPad sales should not have a major effect on earnings until the next quarter. Additionally, this was the first full quarter of the new iPad sales in the United States, so their popularity should help counteract sluggish iPhone sales. iPhone sales have continued to lead Apple's growth, but sales have slowed tremendously over the last quarter as consumers await the announcement of the next iPhone model.

Computer sales have lagged significantly compared to Apple's other products and iPod sales have fallen off a cliff as users swap out their old iPads for the latest iPhone.

Looking ahead, I remain bullish on Apple as the iPad is just the beginning of Apple's technological revolution. Apple continues to be an industry leader and with the iPhone 5, a mini iPad, and Apple TV in development, Apple's sales growth should remain steady for years to come.

With EPS at $10.37, Apple is expected to announce its slowest sales and profit growth in more than two years as consumers await the iPhone 5 and stop buying the 4S. Apple will probably report profit grew 35% to $9.86 billion, according to the average of analysts' estimates compiled by Bloomberg.

With all this being said, I want to put on a bullish trade, but I always want to define my risk vs. reward and I love to play call fly options into earnings. I can get long the stock, but limit the size of my options premium purchased and use the measured move target help me figure out my target.

Here are a few, quick, back-of-the-envelope statistics I'm keeping my eye on related to earnings, movement, and targets:

H. Historical Movement on Earnings

04/25/12 $560.28 $610.00 $ +49.72 (8.9%)
01/25/12 $420.41 $446.66 $ +26.25 (6.2%)
10/19/11 $422.24 $398.62 $ -23.62 (-5.6%)
07/20/11 $376.85 $386.90 $ +10.05 (2.7%)

Average Magnitude of Post Earnings Return 5.8%

I. Implied Movement: +/- $34.50 or 5.8%

M. Measured Move Target: $595 plus $34.50= $629.50
$595 minus $34.50= $560.50

Bullish With Apple Trading Above ALL Moving Averages, Moving out of consolidation to the upside.


Click to enlarge

All things considered. I have considered these three possible Apple Trades with my thoughts noted on each.

1.Selling the Apple July 570-565 put spread for $1.20 credit, selling the 570 puts and buying the 565 puts
Risk: $380 per 1 lot
Reward: $120 per 1 lot
Breakeven: $568.80
Notes: Risking a lot to not make that much if the stock rips higher, which I think it will.

2. Buying the Apple July 615 Calls for $9.00.
Risk: $900 per 1 lot
Reward: unlimited
Breakeven: $624.00
Notes: Even if Apple gets to the "measured move" target of $630, then options purchased in this instance would be worth $15, close to double what was paid for them.

*3. Buying the Apple July 605-635-665 Call Fly for $7.20
Risk: $720 per 1 lot
Reward: $2280 per 1 lot
Breakeven: $612.20- $657.80
Notes: Great risk vs. reward. If Apple moves to the measured move target of $645, then the trade purchased would triple in value.

*Where does this stock need to go to have max profit?
What do I do if I am wrong?
How to I manage a possible losing position?

I think the third option is the best since I can triple my money on a move to the measured move target of $630, which is also where there has been selling pressure in the past. With good earnings from eBay (EBAY), Google (GOOG), and Intel (INTC), I cannot image Apple selling off on earnings.

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No positions in stocks mentioned.
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