We sent the following Earnings Trade Alert to Earnings Alert Members at 3:14pm EST. The AAPL trade filled @ 1.80 credit, and the NFLX trade filled @ 1.35 credit as noted.
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Today’s top earnings trade candidates are FFIV, AAPL, NFLX, & SNDK. As you might imagine, we could not resist trading AAPL like we couldn’t resist GOOG yday. We chose the same strategy we used with GOOG, but went a little wider and accepted a little lower credit. This will increase our probability of success while also keeping our risk defined and capital requirements low in this high dollar stock.
Aside from the AAPL trade we are sharing in detail below, we could not resist getting a little extra risky with a Short Strangle play in NFLX. Why would we do this? Well, the 179% implied volatility on the Jan4 weeklies vs. 55% hist IV translates to a 3.25x IV differential. That’s juicy and we had to put a little extra risk on the table today as a result.
We sold the NFLX Jan4 80/120 Strangle @ 1.35 credit. Just one, nothing big. The Buying Power Effect (BP Effect) is approx $1,390, which means the probability of losing more than $1,390 is extremely low. The strangle puts us 2x outside the downside expected move and approx 1.6x outside the upside expected move.
As always, we are simply sharing what we did. Follow at your own risk.
Earnings Trade Candidate: AAPL
Easy to Borrow (ETB): yes
Liquid Options: solid OI & volume, wide bid/ask spread of 5-15 cents
Offers Weekly Options: yes, Jan4
IV differential: approx 2.7x, 95% front month IV vs. approx 35% historical IV
Current Price: 513.10
Expected Earnings Move: +/- 31.50
Expected Move Range: 481.60 - 544.60
Selling (to open) AAPL Jan4 470/475/550/555 Iron Condor @ 1.75 Day Limit (credit)
Iron Condor Legs (per spread):
Buy 1 AAPL Jan4 470 Put (debit from account)
Sell 1 AAPL Jan4 475 Put (credit to account)
Sell 1 AAPL Jan4 550 Call (credit to account)
Buy 1 AAPL Jan4 555 Call (debit from account)
Max Potential Gain: $175 per spread if AAPL expires expires between 475 & 550
Max Potential Loss: $325 if AAPL expires below 470 or above 555
Break Even: 473.25 lower b/e, 551.75 upper b/e
Explanation: When selling Iron Condor’s into earnings, we look for a credit equal to or greater than 30% the width of the spread on an IC that gets 1x the expected move range. In this case, we have the opportunity of getting a credit of 35% the width of the spread (1.75/5.00) on an IC that puts us approx 1.3x outside the expected move.
The greater than 1x width of the IC profit range coupled with the psychological strength of the price points of the short legs (475 & 550) makes this a trade we are willing to risk some capital on. As always, we are staying small in size given this is a high risk Earnings based trade strategy.
Here’s a risk plot profile of the Iron Condor and a chart of AAPL showing the profit range (green oval):
NOTE: Trading Options into earnings includes financial risks and may result in loss of capital. Do not consider an earnings based Options strategy unless you understand and accept the capital risks associated with the trade.
p.s. You don’t want to miss another one of our trades, so be sure to sign up for our Earnings Trade Alerts here!
There was a report this morning that, since June 29, 2007 (the first release of the iPhone in the US) iPhone sales have eclipsed sales of all Microsoft products. That’s an incredible statement, and explains a lot about the huge increase in market capitalization that Apple has seen in the past 5 years. Frankly, we’re impressed by the difference, and with positive reports about the iPhone 5 coming out seemingly every day, there’s nothing that says the trend won’t continue.
Just think about this:
June 29, 2007:
So that’s a bit of a difference in returns for the shareholders of both companies… and just think, Apple is the one paying the dividend, too. Not a great half-decade for Microsoft owners. The lesson, if there is one, is that great products and great brands drive great businesses. Even though we’re mostly short term traders, it’s worth it to recognize who the industry leaders are, and why - and in this case, Apple definitely fits the bill.
We try not to be those annoying jerks that brag all the time, but every once in a while we have to toot our own horn a little. That’s the case today with AAPL.
First, on 4/11/12 we told you…
"This latest line that has held since January 25th earnings is very steep, representing the parabolic price action we noted earlier. Lines this steep never stay in tact. We are keeping an eye on it, and intend to place a bearish strategy on AAPL when we see a closes below that line."
Sure enough that parabolic trend line broke and AAPL began to approach the 45 degree trend line we mentioned in the article.
Then, on 5/11/12 we told you…
"One never knows what will happen next, but we suspect continued range bound price action until AAPL runs into the initial up trend support line. At that point, we may start to see some upside in the stock.
The play here may be an Iron Condor given the somewhat high levels of volatility premium priced into shares of AAPL. We intend to explore this strategy, along with other range based options strategies.”
We were right again! Price action has been extremely range bound in AAPL. Now AAPL is testing the 35 degree trend line and so far it has held as indicated by the blue ovals in the image below.
So what’s next? We like AAPL long here. We think positioning bullish in AAPL is the play, and we have already started acquiring shares in the IRA. We plan to enter a bullish options position tomorrow or Friday.