The market has been very volatile as of late, and things don’t seem to be to quieting down anytime soon with a host of volatile stocks expected to announce earnings soon. One in particular — Apple (NASDAQ:AAPL) — looks awfully volatile, and is expected to announce next week.
This trade idea can profit before the actual announcement, but only if AAPL remains relatively quiet into the weekend:
Apple ($401.03): Butterfly Spread
The trade: Buy the April 395/400/405 Call Butterfly Spread (buying the April 395 call, selling 2 April 400 calls and buying the April 405 call) for 95 cents or better.
The strategy: The maximum potential profit for this trade is $4.05 if AAPL is trading right at $400 at April expiration. The long 395 call option would have $5 worth of premium, and the other options would expire worthless. The cost of the trade is then subtracted (5 – 0.95) for the realized profit. The maximum loss is 95 cents, or what was paid for the spread if AAPL is trading below $395 (all options expire worthless) or above $405 (all options would have to be bought or sold) at April expiration. Breakevens are at $395.95 and $404.05 at expiration based on a cost of 95 cents.
The rationale: This is a completely speculative trade idea with only two days left to go until expiration — but one that gives the trader a relatively decent area in which to profit and a respectable risk/reward ratio. The butterfly is perhaps a safer way to sell volatility especially since Apple is expected to announce earnings next week and the stock has taken a dive, triggering an increase in volatility. The normal downside to a butterfly is that maximum potential gains are realized close to expiration. In this case, it is a positive with only about two days to go.
Click to Enlarge Apple shares have fallen in the past few days and broke an area of support at $420 on Wednesday, then kept falling until settling just above $400. The $400 level is not really seen as a support level due to lack of previous pivot levels in the area, but round numbers often act in the role of resistance — or in this case, possible support.
What’s interesting about AAPL’s April 400 strikes is that both the calls and puts have the most amount of open interest, at least within the next few strikes. Maybe there will be some pinning (concept where the stock is “pinned” to a certain strike price that coincides with a round number) going on at the close on Friday, and Apple stock will stick like glue to $400, making this trade idea a real winner!
As of this writing, John Kmiecik did not hold a position in any of the aforementioned securities.