With a full week of trading ahead and the heart of fourth-quarter earnings season upon us, this week should provide quite a few trading opportunities to go long, short or both. One name where I think traders should hedge their best is Apple (AAPL).
AAPL jumped 5% on Friday to regain the $100 level, but the technical outlook remains bearish. The 50-day moving average has crossed back below the 100-day moving average, and a “death cross” formed back in late August. Near-term resistance is at $102.50-$105. Support is at $97.50-$95 on a move back below $100.
AAPL shares could make a run towards $107.50-$110 on continued strength and a better-than-expected earnings report on Tuesday. An earnings miss and lowered guidance could also send shares tumbling.
Wall Street is expecting Apple to earn a profit of $3.23 a share on revenue of $76.61 billion. The high estimate has the company earning $3.44 a share on revenue of $79.96 billion. The low-ball numbers are for $2.83 a share on revenue of $70.65 billion.
This could either mean a headline reading of a $0.21 beat or a $0.40 miss. This type of earnings news could cause shares to move 5%, 7% or possibly 10%, or roughly $10. Shares of Apple could trade above $110 or in the low $90s in extended trading on Tuesday and going into Wednesday’s open. The Aug. 24 low touched $92, and the 50- and 100-day moving averages are just below $110 and $112.
The company has topped estimates during the past four quarters by $0.08, $0.04, $0.17 and $0.46, respectively. However, the earnings beats have become less and less dramatic during the past year, with questions galore as to what is in store for Apple.
These factors tend to lead me toward a bearish trade heading into the announcement, but it’s never a good idea to tug on Superman’s cape. The suits-and-ties are worried about gross margins, weaker-than-expected demand for the latest iPhone and overall erosion in AAPL’s other products. I’m more focused on the company’s $200 billion plus in cash and its fundamentals, which is why I’m bullish on Apple’s long-term future.
Although I’m a little chicken betting on AAPL’s earnings, a strangle option trade might serve as a better candidate than a directional trade. These types of trades are also called “chicken” trades.
The goal of a strangle option trade is to buy out-of-the-money calls and puts together to capitalize on a huge move in a stock in one direction or another. However, it is important to check the premium prices and do some math before picking the options. Additionally, a move of less than 10% in a stock can often lead to negative results in a strangle trade if the premiums get deflated.
Weekly and monthly options are both available to trade on Apple. With earnings due out on Tuesday, I looked at the January weekly chain for a possible setup to avoid paying any unnecessary time premium.
The AAPL January 29 expiration 105 weekly calls (AAPL160129C00105000) were up nearly 200% last Friday on volume of more than 17,000 contracts. These options expire in just a few days this Friday, but they could be used by bullish traders expecting a run past $107 and up to $110. These options would double if AAPL shares trade past $108-$108.50 on Wednesday, or ahead of Friday’s closing bell.
The AAPL Jan. 29 expiration 95 weekly puts (AAPL160129P00095000) fell more than 60% on volume that topped 7,500 contracts. Bearish traders could target these options for a quick in-and-out trade and a possible test to the low $90s. A double would occur if shares trade below $93 on Wednesday’s open, or by Friday’s close.
The aforementioned options together would cost roughly $2.65 based on Friday’s closing prices. For traders who can get into both options for under $3, the breakeven points for the trade would be $108 and $92. A double would occur if shares are above $111 or below $89 by this Friday’s close.
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