Earnings season is rolling on, and Apple (AAPL) is due to report earnings on Thursday (Oct. 2) after the closing bell. The options market is pricing in a 4.2% move in either direction right now. Here’s how to set up a bull put spread to profit if Apple stock follows its recent pattern of reactions.
Earnings Season: Apple Stock To Surge?
It’s important to consider that Apple stock stayed above the lower expected range following five of the last six earnings announcements.
How do we get the expected range? As discussed previously, we simply take the at-the-money put and call strikes at 170 for the Nov. 3 expiration and add them together. That was just over seven points this morning or 4.2% of the price of Apple stock.
Now that we know the expected range, let’s find a bull put spread that has the short strike roughly seven points below the stock price. The closest strike that fits is at 162.50.
So if we sell a Nov. 3 put with a 162.50 strike and buy a 157.50 put at the same expiration, we create a bull put spread.
Profits And Losses For The Trade
This bull put a spread on AAPL stock traded around 70 cents this morning. That means a trader selling this spread receives $70 (70 cents times 100 shares per contract) in option premium. Ideally, the option expires worthless if Apple closes above 162.50 at expiration. In that case, you keep the entire option premium, which is your maximum profit.
Earnings Season: Is Apple Stock A Buy Right Now?
What about the risk? Take the difference of the strikes at five and subtract the option premium received. Multiplying again by 100 shares gives a maximum risk of $430. The long put at 157.50 defines the risk and makes that the most you can lose.
That represents a 16.3% return on risk between now and Nov. 3 if AAPL stock remains above 162.50. If Apple closes below 157.50 on the expiration date, the trade loses the full $430. The break-even point for the bull put spread is 161.80 which is calculated as 162.50 less the 0.70 option premium per contract.
Understand The Risks
There is little room for adjustment with short-term trades such as this held over earnings. They either work or they don’t.
A 16% return in a few days would be nice, but the possibility of losing 100% is also very real.
As such, this style of trade is only for traders with a high-risk tolerance.
If Apple stocks end below 157.50 at expiration, long-term investors could consider exercising the long put and taking ownership of the 100 shares. With the position already being acquired at a discount, you could then sell covered calls against it to reduce your basis further.
Why buy Apple stock?
Should you buy Apple just because these well-known investors have loaded up on the stock? No. However, when four multibillionaires with different investing styles all like the same stock, it should at least prompt retail investors to take a hard look at it.
Apple’s iPhone ecosystem remains the best in the business. The company’s installed base of active devices hit a record high in the quarter ending July 1, in every geographical segment. Apple’s services revenue set an all-time high during the quarter.
The tech giant continues to share its success with investors. In the latest quarter, Apple returned more than $24 billion to shareholders in the form of dividends and stock buybacks.
Steve Jobs, the co-founder and former CEO of Apple who passed away in 2011, famously repeated the same line at Apple’s product showcases: “One more thing…” I think Apple’s ongoing “one more thing” just might be the best reason to buy the stock.
Vision Pro could be Apple’s next big thing. In the company’s latest quarterly update, CEO Tim Cook called the mixed-reality headset “the most advanced personal electronic device ever created.”
But I wouldn’t be surprised if artificial intelligence (AI) is Apple’s next game changer. The company hasn’t been in the AI limelight as some have this year. However, Apple is reportedly developing its own Ajax generative AI model that could change that dynamic.
Earnings Season: The arguments against Apple
There are several arguments against buying Apple stock, though. For one thing, sales of its iPhone, iPad, and Mac products are declining. Many on Wall Street project slower growth over the next five years than Apple delivered over the previous five years.
Meanwhile, Apple’s valuation is sky-high. Its shares currently trade at nearly 27 times their expected earnings. That’s not an encouraging sign given the company’s lower growth outlook.
Then there’s the uncertainty in China, which recently banned government officials from using iPhones. Should the country take further steps against Apple, it would be very problematic. The company generated nearly 20% of its total revenue in China last year.
Siding with the billionaires
My personal view is that Apple stock remains a buy, albeit not as compelling of one as it’s been in the past. I think that the stock could pull back further in the short term because of the aforementioned issues. However, Apple should be a good long-term pick.
I don’t expect the China situation to worsen significantly. Apple has new products on the way that could reverse its sales decline. And the company remains an innovation engine. There are other stocks that could deliver greater gains than Apple but put me on the side of the billionaires with this stock.
Apple (AAPL) is getting ready to reveal how well it’s been doing, and this could affect its stock price. The market expects the stock to move about 4.2% up or down when Apple announces its earnings on Thursday.
To make a strategy for this, we can try something called a bull put spread. This involves selling a put option at a price lower than the current stock price, and, at the same time, buying another put option even lower.
For example, if Apple is at $170, we can sell a put at $162.50 and buy another put at $157.50. This could help us earn some money if Apple stays above $162.50 by the time the options expire.
Here’s the deal: you could make $70 (if each contract is for 100 shares) now by selling this spread. But be careful; if Apple goes below $157.50, you could lose $430. So, be prepared for this risk.
If you’re a new trader, it’s crucial to know that short-term trades like this can be risky. They might give you good returns, but you could also lose everything you put in. So, only try this if you’re okay with taking risks.
If Apple falls below $157.50, long-term investors might consider buying the stock. This could be a good chance to buy it at a lower price. Also, Apple has been doing well, so it might be a good stock to have in your portfolio.
But remember, some people have concerns about Apple. For instance, its sales of iPhones, iPads, and Macs have been going down, and its shares are expensive compared to its expected earnings. There’s also some uncertainty with China, which could affect Apple’s business there.
However, some big investors still believe in Apple, even with these concerns. They think it’s a good investment for the long term. So, if you’re considering buying Apple stock, it might be worth looking into these factors before making a decision.
Earnings Season for Successful Trading
Earnings season, the period during which publicly traded companies release their quarterly financial reports, is a critical time for traders. It’s a period characterized by heightened market volatility and potential opportunities for substantial profits.
However, navigating earnings season can be challenging, and without a well-thought-out strategy, it’s easy to get caught up in the turbulence. This comprehensive guide will equip you with the necessary knowledge and tools to trade earnings effectively.
Understanding Earnings Season
Earnings season typically occurs four times a year, following the end of each fiscal quarter. During this time, companies disclose their financial performance, including revenue, earnings per share (EPS), and guidance for the future.
Traders closely monitor these reports, as they often have a significant impact on stock prices. Positive earnings results can lead to price surges, while disappointing figures can cause sharp declines.
Preparing for Earnings Season
Research and Analysis: Before earnings season begins, conduct thorough research on the companies you plan to trade. Analyze their historical earnings trends, market expectations, and industry performance. Utilize financial news, analyst reports, and company announcements to gather relevant data.
Volatility Management: Recognize that market volatility is likely to increase during the earnings season. Plan your risk management strategy accordingly, considering factors such as position sizing, stop-loss orders, and diversification to minimize potential losses.
Develop a Trading Plan: Establish a clear trading plan that outlines your goals, preferred trading strategies, and risk tolerance. Define entry and exit points based on your analysis of the company’s financials and market sentiment.
Trading Strategies During Earnings Season
Straddle and Strangle Options: Implementing straddle and strangle options strategies involves simultaneously buying call and put options to profit from significant price movements following an earnings announcement. This strategy is effective when you expect a considerable price swing but are unsure about the direction.
Earnings Momentum Trading: Capitalize on positive earnings surprises by trading the earnings momentum. This strategy involves buying stocks of companies that have exceeded market expectations and have demonstrated a positive earnings momentum trend. This can lead to substantial short-term gains as market sentiment remains optimistic.
Fade the Earnings: Contrary to trading the earnings momentum, the “fade the earnings” strategy involves taking positions against the market sentiment following an earnings announcement. This approach assumes that the market overreacts to the earnings report, causing temporary price distortions. Traders can benefit by anticipating a reversal in the stock price after the initial reaction.
Event-Driven Trading: Utilize event-driven trading strategies that focus on specific market events, such as product launches, regulatory approvals, or mergers and acquisitions, in conjunction with the earnings release. Identify stocks that have a potential catalyst, as these events can trigger substantial price movements and present lucrative trading opportunities.
Risk Management and Mitigation
Diversification: Spread your investment across different companies and sectors to reduce the impact of potential losses from a single stock’s poor earnings performance.
Stop-loss Orders: Implement stop-loss orders to limit losses and automatically sell a security when it reaches a predetermined price. This tool helps protect your capital in the event of unexpected market movements.
Portfolio Hedging: Consider hedging your portfolio using options or other derivatives to offset potential losses from adverse earnings reports. This can provide a level of protection against market volatility and minimize downside risk.
Fundamental Analysis: Continue to conduct fundamental analysis to understand the underlying financial health and long-term prospects of the companies you are trading. Do not solely rely on short-term earnings data when making trading decisions.
Post-Earnings Season Assessment
After the earnings season concludes, take the time to evaluate your trading performance and the effectiveness of your strategies. Analyze your trades, identify areas for improvement, and adapt your approach based on lessons learned. Additionally, reassess your risk management techniques and adjust them as necessary to enhance your trading strategy for the next earnings season.
Earnings season presents traders with an array of opportunities to capitalize on market volatility and generate significant profits. By adopting a well-researched and disciplined trading approach, you can navigate through the complexities of earnings season and position yourself for success.
Remember to stay informed, manage risks effectively, and continuously refine your trading strategies to adapt to the dynamic nature of the market. With the right tools and knowledge, you can leverage earnings season to achieve your trading goals and maximize your investment returns.
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Competitive Spreads: Benefit from competitive spreads and low trading costs provided by CMTrading, allowing you to maximize your profits and minimize trading expenses during Earnings Season.
Secure and Reliable Trading Environment: Trade with confidence in a secure and reliable trading environment facilitated by CMTrading, ensuring the safety of your funds and personal information at all times.
Access to Multiple Markets: Enjoy access to a diverse range of global financial markets, including stocks, commodities, currencies, and indices, enabling you to explore various trading opportunities during Earnings Season.
Tailored Trading Solutions: Customize your trading experience with personalized solutions and services offered by CMTrading, tailored to meet your specific trading goals and preferences during Earnings Season.