With Apple (NASDAQ:AAPL) continuing its dive into the abyss, the denizens of Wall Street wait with baited breath for tonight’s Q1 earnings release. Will the market gods grant the beleaguered bulls a respite from their painful plight, or will tomorrow’s jump follow the past three earnings-driven gaps and take Apple shares further into the deep? \

Of course, the answer remains shrouded in mystery but, hey, it’s not like we have to wait too long to find out. The curtain drops after market close today, revealing the fallen rock star’s latest numbers in all their glory. For the record, the estimate for Apple earnings is $10.07 per share.

Click to Enlarge From a technical perspective, the price chart of AAPL looks atrocious by just about any measure. With yesterday’s sub-$390 print, its shares are now 45% off their all-time highs and down over 25% year-to-date. Its price trend remains stuck in a death spiral complete with declining moving averages across the board. Regardless of what the fallen darling pulls out of the hat tonight, it’s going to take time to heal the damage that’s been done.

Forecasting the direction of the post-earnings gap is almost always a fool’s errand. It’s a veritable coin flip denying any kind of edge to bulls or bears. And yet, some might contend that the recent earnings trend is more likely to continue than not. If so, it arguably paints a foreboding picture for the already struggling stock. After all, it’s not as if the shares gapped down the past three quarters because the company smashed expectations.

As suggested with my recent Google (NASDAQ:GOOG) earnings preview, market expectations for the size of the earnings gap can be deftly gauged by the value of weekly option straddles. With AAPL closing around $399 on Monday, the April weekly straddle costs $27.75, effectively pricing in a move of 7% up or down by the end of the week. Since the April options we’re using have a full three trading sessions (Wednesday-Friday) after the earnings reaction, the expected size of the gap is actually less than 7%. If we take into account the average daily price range of AAPL recently — $10.46, or 2.6% — it’s fair to say the options are actually betting the earnings gap will be around 4% to 5%, which is similar to expectations for GOOG earnings last week.

In light of the somewhat smaller anticipated gap, selling short-term options in front of the release doesn’t offer that great of a reward when compared to what’s at risk if AAPL experiences another monster jump like last quarter (stock was down 10% post-earnings).

If you’re still set on entering some type of trade into earnings, consider playing with longer-dated options that provide a greater margin of error.

If you’re bullish, sell July 330-325 put spreads for 70 cents credit. Consider it a bet that AAPL is unlikely to fall an additional $60 from current levels over the next few months. The reward is limited to 70 cents and will be captured if AAPL remains above $330 by July expiration. The risk is the distance between strikes minus the net credit, or $4.30.

If you’re bearish, consider waiting for a better setup to enter positions. With AAPL having dropped about 10% in the past two weeks alone, the risk-reward isn’t really that appealing at this stage for initiating new bearish plays.

As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.