Trade of the Day: Apple (AAPL)

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Tech has led the rebound rally out of the trading range, and I mentioned to my Momentum Options members that last week’s action would boil down to the earnings announcements from Amazon.com (AMZN), Alphabet (GOOG) and Microsoft (MSFT). All three companies reported stellar results that topped Wall Street expectations. Now Apple (AAPL) will be in the spotlight this week, as its announcement is scheduled for Tuesday after the close.

The suits-and-ties are looking to AAPL for a profit of $1.88 a share on revenue slightly north of $51 billion. The high estimate has the company earning $2.02 a share on sales of nearly $53 billion. The low estimate is penciled in at $1.75 a share on revenue of over $49 billion. Analysts have given AAPL six earnings upgrades during the past month, with one coming in the past week.

In July, following the last update, Apple said it expected revenue to come in at $49-$51 billion for the recently ended quarter. The company has topped expectations during the past four quarters by $0.04, $0.17, $0.46 and $0.11, respectively.

An earnings beat or miss will depend on how well Apple’s iPhone sales went following the release of the iPhone 6s and iPhone 6s Plus in September. While expectations are high, the upgrades debuted during the backend of the quarter.

Apple also has a history of “sandbagging” its earnings outlooks to lower the Street’s expectations, while at the same time trying to top the numbers. It is a delicate cat-and-mouse game that all publicly-traded companies play. This will be a more important quarter given last week’s results from the three tech/retail titans I mentioned earlier, so Apple will be expected to follow suit.

The company took pre-orders for the iPhone 6 upgrades as well as the upcoming iPad Pro and the new Apple TV. These sales won’t have a significant impact on earnings until the January 2016 report. The good news is that the current quarter is typically Apple’s strongest of the year. The company’s Apple Watch sales will also likely help or hinder results based on those sales estimates.

AAPL shares cleared their 100-day moving average with Friday’s 3% pop and push past $119. The 50-day moving average is starting to curl higher, and the 200-day moving average is less than $2 away. Shares will likely test $121 going into the announcement. From there, it’s possible that there could be a $12-$15 move based on earnings and Apple’s outlook. This means a push past $130-$135 or a drop below $110-$105.

The options chains will be active, as there are weekly and monthly options available to trade. The AAPL October 125 weekly calls (AAPL151030C00125000) were up a stunning 423% on Friday, with volume exceeding 23,700 contracts. These options could move another 400% if AAPL shares zoom past $130 by this Friday’s close.

On the flip side, the AAPL October 110 weekly puts (AAPL151030P00110000) tanked 43% last Friday on volume north of 6,200 contracts.

Both of the aforementioned weekly call and put options could be used together as a strangle option trade with a combined entry price of $1.40-$1.50 based on Friday’s close and the spreads. The breakeven point for the trade would be if AAPL shares are above $126.50 or below $108.50 by this Friday’s close. A double would occur if AAPL shares are above $128 or below $107.

I love the risk/reward this trade offers, but the main risk is if shares react mildly to the news and stay between $110-$125. This would likely cause the premiums to deflate and could cause a huge drawdown on the position.

The AAPL November 127 monthly calls (AAPL151120C00127000) zoomed more than 200% on Friday on volume better than 1,500 contracts. These call options would give bullish Apple traders a chance to play a possible run towards $130-$135. These options would double if AAPL shares trade past $129 and would return 200% if shares tap $130. Of course, if Apple disappoints, shares could head south and back toward $100. These options would take a huge hit on an earnings miss and lowered guidance.

Apple is currently the Dow’s seventh-largest-weighted stock. Home Depot (HD) and Nike (NKE) are ahead of Apple, but a stellar earnings report could help with the stock’s ranking.

I’m bullish on Apple and, if I take either of the aforementioned AAPL trades, I’ll let my Momentum Options members know, so join us today if you want to get my latest recommendations.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/10/aapl/.

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