With the market still flopping around support, unable to piece together a respectable bounce, investors will be watching this evening’s Apple (NASDAQ:AAPL) earnings call closely. A positive surprise could be just the spark the bulls need to stage a recovery from the recent downdraft … or Apple may follow Google’s (NASDAQ:GOOG) lead and serve up a nasty freefall for investors. One way or the other, the response to tonight’s unveiling of Apple’s Q3 performance may well hold the key for the market’s next move.
Let’s take a look at the options board to see what investors are expecting heading into tonight’s main event.
Click to Enlarge The easiest way to assess market expectations for the post-earnings move is to look at the price of a weekly straddle. Since the October weekly straddle expires tomorrow at the end of the day, it is priced solely on expectations for tonight’s earnings release. With AAPL currently trading around $610, the Oct weekly straddle costs $32.50, which is pricing in a move of 5.3% in either direction. The magnitude of the expected range is highlighted in the price chart at right.
To provide some historical context, AAPL has gapped an average of 5.35% over the past six earnings announcements (measuring the post-earnings day open vs. the pre-earnings day close). So the current expectations are pretty much in-line with recent earnings gaps.
If you’re looking for an options play, the key question is whether options are overpriced or underpriced. This time, it appears to be a toss-up — neither option buyers nor option sellers possess the upper hand. It might be a good idea to sit this earnings season out.
If I were inclined to participate, I’d lean toward selling options in some fashion into the event — volatility may be a bit pricey headed into this much-scrutinized release. If you have a bullish bias, sell the November 540-535 put spread for a $0.55 credit. If you have a bearish bias, sell the November 680-685 call spread for $0.53.
At the time of this writing, Tyler Craig had no positions on any of the aforementioned securities.