By Robert Hauver
Apple, (AAPL), has been much more volatile ever since the US Dept. of Justice announced an investigation into possible e-book price fixing, dropping from its high of $644.00 down to a $572.98 close this week. Adding to the volatility is the anticipation for AAPL’s next quarterly earnings report, scheduled for Tuesday, April 25th.
AAPL has reported spectacular earnings growth over the past 4 quarters, and has surprised to the upside in the “Earnings Surprise” game in 3 of the past 4 quarters. The table below shows the Post-Earnings Share Price changes on the day following each earnings report.
AAPL’s “stumble” in mid – Oct. 2011, when it reported a mere 52% EPS growth and missed inflated analyst expectations, happened during last fall’s high volatility period. The share price only fell -5.59% the day after earnings, but fell from $422.24 to a low of $363.57, (a 13.90% drawdown). during the Nov. market pullback, finally recovering on Jan. 6, 2012, and is currently approx. 36% above its Oct. 18, 2011 price, as of 4/20/12:
After AAPL’s stellar Q1 Fiscal Year report, analysts have kept raising earnings estimates for next Tuesday’s report, with growth forecasts that leave AAPL’s mega-cap peers in the dust. Looking at AAPL’s past quarterly EPS growth numbers, though, one can hardly blame them for getting so excited.
With estimates and expectations so high, one wonders if AAPL can possibly avoid “disappointing” analysts next Tuesday, while still turning in strong growth figures? Moreover, how will the market react?:
So, how can you profit from AAPL’s current volatility and 12.6% pullback? The prudent approach is probably to wait for next Tuesday’s results and market reaction, but what if AAPL blows out its earnings once again, and soars out of reach?
Fortunately, AAPL has rather high options yields, so, a conservative way to profit in this situation, even if AAPL soars, is to sell cash secured puts below AAPL’s share price, which, of course, is a rapidly moving target. Conversely, if the market is disappointed with AAPL’s report, and its price declines, its put option premiums will rise, including those on the many other strike prices below these put options, resulting in even lower break-even points.
You could sell puts at an even lower strike price in that scenario. As usual, you’ll get paid the put premium price within 3 days of making the trade.
There are 2 variables to this approach – Expiration Month and Strike Price. Here are some examples of the current put options payouts for 2 different put option strike prices that expire in August. Lower strike prices offer lower put premium payouts, but also have lower break-even prices. The key here is to find a strike price far enough below AAPL’s stock price that achieves the balance between your risk tolerance and your target option income:
There are more details on these and over 30 other Cash Secured Puts trades with high options yields in our Cash Secured Puts Table.)
The next table has examples of the current put options payouts for various expiration months, using the same put option strike price of $580.00. Put premiums are higher for longer expiration dates, which gives you a lower break-even, but a lower annualized yield, due to the longer time period. Again, the more conservative approach is to sell at strike prices further below AAPL’s strike price.
AAPL is due to join the ranks of dividend paying stocks sometime in the July-Sept. 2012 quarter, but hasn’t announced its ex-dividend date yet. (Note: Put sellers don’t receive dividends, we list dividends here for comparison only.):
Disclosure: Author is short Apple put options.
Disclaimer: This article is written for informational purposes only and isn’t intended as investment advice.