When Apple Inc. (AAPL) steps into the earnings confessional after the close tomorrow, very few people will be looking to see if the company topped Wall Street’s earnings or revenue estimates. At the end of the day on Tuesday, when it comes to Apple’s stock price, it’s all about the iPhones … baby.
Fundamentally, Apple has bested Wall Street’s targets in every quarter for the past two years. And with analysts steadily lowering their targets during the past month, the likelihood of Apple not only meeting but beating these targets becomes increasingly likely.
But topping the consensus estimate of $3.23 per share on $76.61 billion in revenue will be a moot point given all the attention weak iPhone sales have garnered in the major media headlines.
Speaking of heavy bullish sentiment, the first-quarter whisper number for Apple rests at $3.40 per share. Dovetailing with this short-term outlook, Thomson First Call reports that the brokerage community’s long-term outlook is also extremely bullish for Apple.
Specifically, 40 of the 49 analysts following Apple stock rate the shares a buy or better, with no sell ratings to be found. What’s more, the 12-month consensus price-target of $141.50 represents a 34% premium to Friday’s close.
Options traders are also betting big on Apple’s stock price. Currently, the January/February put-call open interest ratio for AAPL rests at 0.63, with calls nearly doubling puts among options set to expire within the next two months. That said, this ratio plunges to 0.36 for the weekly Jan. 29 series.
In other words, calls nearly triple puts among options that will be most affected by Apple’s quarterly report.
Click to Enlarge Overall, weekly Jan. 29 series implieds are pricing in a potential post-earnings move of about 6.3%. This places the upper bound at about $107, while the lower bound lies at about $94.50.
A rally leaves AAPL just shy of overhead resistance at $110, while a decline could see the shares test their August lows.
However, if iPhone sales deviate significantly in either direction, implieds may be underestimating the potential post-earnings move for Apple stock.
2 Trades for Apple Stock
Call Spread: Personally, I believe that the AAPL iPhone-induced selloff has been overdone, exacerbated by selling pressure in the broader market.
Apple stock is already beginning to bounce back from oversold levels, and earnings could provide additional fuel for this rally, especially if the concerns for iPhone sales are a bit overblown. Traders looking to take advantage of a continued rally might want to consider a February $105/$107 bull call spread.
At last check, this spread was offered at 64 cents, or $64 per pair of contracts. Breakeven lies at $105.64, while a maximum profit of $1.36, or $136 per pair of contracts, is possible if the Apple stock price closes at or above $107 when February options expire.
Put Sell: If an outright bull call play makes you nervous, then a deep out-of-the-money put sell may be more to your risk level. Along those lines, a weekly Jan 29 $90 put sell might be a way to capitalize on AAPL’s technical support
At last check, the Jan 29 series $90 put was bid at 30 cents, or $30 per contract. The upside to this put sell strategy is that you keep the premium as long as Apple stock closes above $90 when January options expire at the end of this week.
The downside is that should AAPL trade below $90 ahead of expiration, you could be assigned 100 shares for each sold put at a cost of $90 per share.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
