Trade of the Day: Apple (AAPL)

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Last week was all about the Nasdaq and its record run. However, with a number of blue-chip companies reporting earnings this week, I wanted to focus on the Dow and Apple (AAPL) specifically.

All last year, I told my Momentum Options members that the Dow needed to add Apple if it were to make a run at 18,000-20,000, and those predictions are coming to fruition. Apple will be announcing earnings on Tuesday. Google’s (GOOG) strong results propelled the Nasdaq to fresh all-time highs and Apple is in position this week to do the same for the Dow.

Apple will be one of the larger blue-chip stocks reporting this week and currently ranks fifth as far as price weight on the index. Goldman Sachs (GS) reported its numbers last week and is No. 1. Other Dow companies reporting will be International Business Machines (IBM) after today’s close, Boeing (BA) and United Technologies (UTX) on Tuesday, and 3M (MMM) on Thursday.

IBM is the No. 2 price weighted stock on the Dow, 3M is No. 3, Boeing is No. 4. United Technologies is No. 10. There are other Dow companies that will be reporting throughout this week, as well. With four of the top five Dow stocks reporting earnings, a 3%-4% move is possible on the Dow this week. This would mean roughly a 500-700 point move from current levels.

While this might seem high, there have been six 3%-4% moves in the Dow over the past two decades following the week after July option expiration, which occurred this past Friday.

The price action in Apple in the past three months has been the narrowest range over the past 15 years. The longer the trading range, the bigger the breakout or breakdown will be, based on simple technical analysis. Apple is expected to earn $1.80 a share on revenue of $49.26 billion.

One brokerage firm said Apple would deliver a beat-and-raise quarter, and that seems to be an easy call based on history. The company has topped estimates by $0.17, $0.46, $0.11 and $0.05 during the past four quarters, respectively. However, the company has a history of sandbagging its numbers and likes playing the cat-and-mouse game with the suits and ties.

The 52-week high for Apple shares is at $134.54. This is less than a 5% move from current levels. It’s likely shares will be pushing $140, or $120, following the event or by Friday’s close.

With Apple near $130, there are numerous ways to play the stock by using options and less capital. With earnings on Tuesday, I decided to look at the weekly options that expire this Friday on Apple as they will be highly active and traded.

The AAPL July 24th $135 calls (AAPL150724C00135000) surged 163% on Friday but could continue to zoom if AAPL shares make a run past $135 to $140.

Bullish traders can buy these calls at current levels, and I recommend considering exiting half by Wednesday and exiting the entire position by Thursday or Friday morning. The breakeven point is just north of $136 by Friday’s close. A move to $137 in Apple shares would get these calls $2 in the money and would represent nearly a double from current levels.

Conversely, Apple shares could test $125-$120 on an earnings miss or lowered guidance. Bearish traders can buy the AAPL July 24th $124 puts (AAPL150724P00124000) at current levels. These puts would double if AAPL shares test $122, or worse. The breakeven point is at $122.95 by this Friday’s close.

The two aforementioned options would also make a strangle option trade with a premium of $2.00-$2.10 based on Friday’s closing prices. The breakeven points would be at $122 and $137. A 100%-plus return could be achieved if AAPL shares trade to $120 or less or are above $139 by this Friday’s close.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/07/trade-of-the-day-apple-aapl-5/.

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