- Apple (AAPL) reports earnings after hours today.
- Investors are hoping for a continuation of the optimism seen following the reports of Microsoft (MSFT) and Meta Platforms (FB).
- You can capitalize on the volatility surrounding the event using options to trade AAPL stock.
Apple (NASDAQ:AAPL) reports earnings after the bell, and investors are hoping the technology giant delivers. The Nasdaq just hit a new low for 2022, and AAPL stock has contributed to the damage. The company’s shares are down 12% this year.
So far, earnings season has seen mixed results from other market heavyweights. The numbers haven’t been terrible, but we needed something spectacular to spur a turnaround given the weak market backdrop.
Microsoft (NASDAQ:MSFT) and Meta Platforms (NASDAQ:FB) both saw positive responses, but a solid report from Apple is needed. Let’s look at its price chart and market expectations heading into tonight’s release. Then I’ll share a unique way to play the volatility using an options strategy.
| AAPL | Apple | $159.80 |
AAPL Stock Chart
This year, Apple’s share price hasn’t been immune to the volatility seizing risk assets. A beautiful uptrend has turned into a sloppy, whippy trading range.
We’ve seen some epic rallies along the way, but none of them stuck. As is always the case when a range takes root, the moving averages have become mainly irrelevant. They’ll remain so until a bona fide trend develops.
Microsoft earnings delivered a shot in the arm on Tuesday, but the rally ultimately failed. Shares are up Wednesday morning on the back of Meta’s robust report, but the risk of a failed rally remains.
This is the problem with the stock market right now. The headwinds of a hawkish Federal Reserve, booming interest rates, sky-high inflation and Russia’s invasion of Ukraine are proving too much for decent earnings to overcome.
The $155 level has provided support multiple times this year for AAPL stock and remains the level to watch. It’s hard to imagine the rest of the market holding up if Apple falls below it.
Market Expectations for Apple
The options market is pricing in an $8.13 move on earnings. Given the share price of $160, this translates into a 5% move. Implied volatility has experienced the usual pre-earnings bump and now lies at 44%.
If I had to lean directional into the event, I’d favor the bull side for two reasons. First, the responses out of Microsoft and Meta Platforms show there’s at least some appetite for buying. Second, with AAPL stock modestly off its highs, it’s been de-risked to a certain extent.
Of course, if you want to sidestep direction altogether, the options market provides many ways to bet on volatility or the magnitude of the earnings gap. Ultimately, this comes down to wagering it moves more or less than expected. And the beauty of the bet is that it doesn’t matter which direction the stock moves.
If you want to go long on volatility and bet on a big move, I suggest using a debit condor. It’s cheaper than a straddle and gives you a better chance of success. We’re going to purchase a short-term bull call spread using OTM options while simultaneously buying an OTM bear put spread of the same expiration. Below is the trade structure I’d consider.
How to Trade AAPL Stock
Debit Condor: Buy the May 6 $150/$145 bear put and $165/$170 bull call for a net debit of $2.40.
You’re risking $2.40 to make $2.60. To win, you need AAPL stock to either rise above $167.40 or fall below $147.60 by expiration. That said, if it gets anywhere close to them over the next few days, you’ll score a profit.
The alternate idea is to bet on options being overpriced by building a position that profits if AAPL moves less than expected. You can do this by making an iron condor that consists of selling an OTM bear call and bull put. Here’s the structure I like.
Iron Condor: Sell the May 6 $140/$145 bull put and $175/$180 bear call for $1.30.
This position profits as long as AAPL stock sits between $145 and $175 at expiration.
On the date of publication, Tyler Craig did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
