Shares of Apple Inc. (AAPL) are facing a key technical pivot point when the company heads into the earnings confessional after the close on Tuesday.
AAPL stock has slowly fought its way higher over the past couple of weeks, and while the shares are still down sharply from a quarter ago, Apple stock could rally quite a few technical traders by taking out the $120 level on a solid third-quarter earnings report.
For the record, Wall Street is forecasting a 32% jump in Apple earnings, with the consensus expecting profits to rise to $1.88 per share from $1.42 per share a year ago. Meanwhile, revenue is expected to jump by double digits, advancing 21.3% to $51.11 billion on the quarter.
Historically, Apple has put in a stellar fundamental performance in recent quarters. In fact, the company has bested Wall Street’s targets in every quarter for the past two years. As a result, EarningsWhisper.com reports that Apple’s third-quarter whisper number will arrive roughly 6% higher at $1.99 per share.
The problem with Apple earnings is that the stock’s reaction isn’t always about the bottom line. Last quarter, Apple posted strong results, but sluggish iPhone 6 sales and unknown Apple Watch figures sent the stock sliding lower. Analysts are currently targeting 4 million in Apple Watch sales for the September quarter, with analysts looking for iPhone sales guidance coming in around 75 million for the fourth quarter.
Overall, the brokerage community remains extremely bullish on Apple. According to data from Thomson/First Call, 38 of the 50 analysts following AAPL stock rate the shares a “buy” or better, compared to 11 “holds,” and just one “sell” rating. The 12-month consensus price target currently rests at a reasonable $150 per share, representing a premium of 30% to current levels.
Despite a recent increase in call activity for AAPL options, options traders remain rather skeptical of Apple stock. Specifically, AAPL’s October/November put/call open interest ratio comes in at 0.90, with put OI arriving in near parity with call OI — an unusual occurrence for Apple stock, which typically has an overwhelmingly bullish sentiment backdrop. Furthermore, this ratio rises to 0.95 when we focus solely on the weekly October 30 series.
Overall, weekly October 30 series implieds are pricing in a potential post-earnings move of about 5.3%. A breakout to the upside could see AAPL challenge overhead resistance at $125, while a decline should be held in check by support at $115.
2 Trades for AAPL Stock
Call Spread: Despite last month’s reaction, and the potential for the Apple Watch to continue to disappoint, it’s hard to bet against Apple heading into earnings. From a contrarian standpoint, the healthy degree of skepticism creeping into Apple’s sentiment backdrop could be a good thing for the stock, as it means there is sideline money available to push the shares higher following a solid report.
With that in mind, those looking to jump on the bullish bandwagon might want to consider a November $120/$125 bull call spread. At last check, this spread was offered at $1.39, or $139 per pair of contracts. Breakeven lies at $121.39, while a maximum profit of $3.61, or $361 per pair of contracts, is possible if AAPL stock closes at or above $125 when these options expire.
Put Sell: Traders worried that Apple stock may stagnate or not receive enough of a post-earnings bump might want to consider a put sell position as a way to take advantage of technical support. At last check, the weekly October 30 series $110 put was bid at $1.59 cents, or $159 per contract.
As long as AAPL stock trades above $110 through expiration this Friday, traders pursuing this strategy will keep the $159 premium. However, if AAPL trades below $110 ahead of expiration, you could be assigned 100 shares for each contract sold at a price of $110 per share.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
