Apple (AAPL) reports third-quarter earnings after the close today, and analysts are expecting revenues of $51.11 billion and EPS of $1.88. The latest whisper number comes in a little higher, calling for EPS of $1.99 per share of AAPL stock.
With iPhone sales accounting for the majority of Apple’s revenues, all eyes will be on iPhone sales, with consensus estimates looking for 48 million to 49 million iPhone sold.
Guidance for the all important fourth quarter (holiday season) revenue projections will also be a key metric, especially given the tough comparison to last year’s record of 74.5 million in iPhone sales.
While analysts will be carefully dissecting the numbers post-earnings, traders will be carefully watching two key technical levels post-earnings for a potential breakout in the AAPL stock price. To the upside, $120 is a key technical resistance level on AAPL, having initially broken past that level on Feb 10. AAPL stock stayed above the key $120 level, with one test on July 9, until it broke down on Aug 3.
Key support for AAPL is at $106.50, having held that critical level several times in late 2014 and early 2015. It also held again in late August and early October, bouncing off support numerous times. So $120 and $106.50 will be the major levels technicians will be watching post-AAPL earnings, although many technical analysts will likely discount the volatility of after-hours trade and focus on how the stock trades regular way the following morning.
AAPL options are definitely reflecting a heightened level of concern in front of the earnings announcement, with the Oct $105 puts (8.92% out-of-the money) trading at 76.33% implied volatility and the corresponding Oct $125 calls (8.43% out-of the money) carrying a 64.22% implied volatility.
These numbers compare to implied volatility levels in Q1 of 57.84% and 56.66% and Q2 of 65.40% and 54.98% respectively for similar options in front of the last two earnings announcements. So the options are priced for a much bigger move than we’ve seen over the past few quarters.
With implied volatility (another way to express option prices) heightened, playing the breakout can still be rewarding, but it will take a bigger move to recoup the initial cost. The Oct $115 at-the-money straddle (Oct $115 calls and Oct $115 puts), which expires Friday, closed at $7.65, or 6.64% of AAPL stock price. Last quarter, a similar earnings-based straddle was priced at only 4.88% of AAPL stock price, while in Q1 the same straddle priced at 5.19%.
With AAPL stock closing 3.19% lower on Monday, at $115.28, it is now positioned back towards the middle of the trading range. With the Oct $115 straddle priced at $7.65, the breakeven points are $122.93 to the upside and $107.63 to the downside. So for traders looking to go long AAPL options in front of earnings, a breakout from the $120 to $106.50 trading range is likely needed for the positions to be profitable.
As of this writing, Tim Biggam did not hold a position in any of the aforementioned securities.