Don’t expect a lot of drama when Apple (AAPL) releases its fiscal third-quarter earnings report after the close tonight. Renown across Wall Street for its “one more thing” approach to marketing new products, Apple offered nothing new during the quarter.
No iPhone update. No iPad update. Not even an iOS update.
The lack of new material shouldn’t come as too big of a surprise, given that CEO Tim Cook told investors during the last Apple earnings call that the company wouldn’t have anything new hitting the street until the fall. If this were any other company, Wall Street and investors alike would have adjusted their expectations accordingly. But, this is Apple.
Taking a look at the numbers, the company’s current guidance is for third-quarter revenue of between $33.5 billion and $35.5 billion. Gross margin is forecast between 36% and 37%. Wall Street, meanwhile, has set its sights on earnings of $7.31 per share; a plunge of 22% from the same quarter last year, on revenue flat with year-ago results.
The whisper number hints that expectations might be considerably higher, arriving at $7.43 per share, according to EarningsWhisper.com.
With the lack of new/updated products, Apple’s unit sales figures will play an even bigger role this time around. The consensus is for iPhone shipments of 26.5 million, though some targets place the number as high as 29 million units.
As you can see from Apple’s whisper number and the upper range of expected iPhone shipments, expectations remain elevated heading into Apple earnings. Nowhere is this exuberant bullish sentiment more prevalent than in the brokerage community.
In fact, Thomson/First call data indicates that Apple has attracted a whopping 43 “buy” ratings, compared to 12 “holds” and a measly two “sell” ratings. Only the 12-month consensus price target shows any sign of restraint, coming in at $538.44 — a premium of only about 26% to Monday’s close.
There also appears to be a bit of restraint among Apple’s options traders. In the front two months of options (including weeklies), there are roughly 288,000 calls open compared to about 209,000 puts. The resulting put/call open interest ratio of 0.72 is moderate for Apple, which typically sees such ratios in the 0.5-to-0.3 range.
Focusing solely on the soon-to-expire weekly July options reveals a much more optimistic configuration, which is historically more accurate for Apple. Specifically, the 87,600 weekly calls and the 51,000 weekly puts combine for a weekly July put/call open interest ratio of 0.58, hinting that call open interest is on the verge of doubling put open interest.
What makes these July options even more speculative (and thereby more bullish in nature) is that they expire at the close of this week. In other words, traders buying and selling weekly July AAPL options are likely banking almost exclusively on the stock’s reaction to tonight’s third-quarter earnings report.
Overall, weekly July options are pricing in a post-earnings move of about 4.2% for AAPL shares. Such a move would place the upper bound near $442.70, while the lower bound lies near $407.30. Both of these levels are well within AAPL’s current trading range between its April/June lows near $385 and growing resistance near $450.
Click to Enlarge Technically speaking, the stock is rebounding from near-oversold levels in the wake if its latest test of support near $385. AAPL is currently battling short-term resistance near $430, where its 10- and 20-week moving averages currently reside. AAPL’s 50-day moving average is also in the $430 region. These trendlines have helped guide the shares lower since their September 2012 peak near $700.
With no new products released during the quarter, and tough year-over-year iPhone and iPad sales comparisons, Apple will have a hard time impressing its historically bullish investing crowd. Combine these expectations with a wash of bullish sentiment from the brokerage community, and there is the distinct possibility that AAPL shares could be in trouble.
As such, those traders looking to take advantage of a post-earnings decline for AAPL might want to consider an August 430/400 bear put spread. At the close of trading last night, this spread was offered at $12.15, or $1,215 per pair of contracts. Breakeven lies at $417.85, while a maximum profit of $17.85 is possible if AAPL closes at or below $400 when August options expire.
For those that feel a little bit squeamish entering an outright bearish play on AAPL, an alternate pre-earnings trade could be an August 385/380 bull put spread — a trade that keys off AAPL’s technical support near its April/June lows. At the close last night, this spread was bid at 40 cents, or $40 per pair of contracts. The maximum profit is the 40-cent credit collected upon initiation, while a maximum loss of $4.60 is possible if AAPL closes at or below $480 when August options expire.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.