There has been a bit of confusion as to what exactly what the reserach Jim Cramer quoted Mark Sebastian on last night meant (watch the Video here). Here is the research that was used along with a slightly more indepth description. It should clear up any confusion. As a follow up, you can catch our live webinar on using options to trade stock earnings on Feb 15th. Register here.
It is impossible to deny that AAPL has one of the most, if not the most, talked about earnings release of any technology company. AAPL’s combination of a rabid fan base, huge market capitalization, and wide stock ownership forces traders to pay attention. The earnings have become such a big deal that sites such as TheStreet now open chat rooms to discuss AAPL earnings. On October’s release, TheStreet had around 15,000 AAPL enthusiasts in its earnings chat room.
Leading into this cycle, AAPL has rallied more than 15%. I thought it might be interesting to study chart patterns on performance after AAPL releases earnings. In particular, when the stock has had a big run up prior to the release. First let’s look at 2010:
graph from thinkorswim
Number 1 and Number 2 both point toward times where AAPL had a HUGE run up leading into earnings. After the earnings report, if the stock did not immediately sell off the next day, within a few days the stock had dipped lower than where it was trading before earnings were released. If we were looking at only 2010, our research would suggest to sell AAPL the day before it releases its earnings report, let the stock sell off on earnings, wait two weeks, and then buy it back.
Moving on to 2011 we see 2 more instances of major run ups occurring prior to an earnings.
graph from thinkorswim
Again, in both cases, if the owner of AAPL stock sells his or her stock position before earnings and then waits two weeks to buy it back, the trader is a winner. It is important to note that in July, AAPL actually did rally quite hard the day after earnings; however, that rally was short lived. The trader would have only been kicking him or herself for about 2 days.
Looking ahead to AAPL’s results in 2012 we see another nice looking rally:
graph from thinkorswim
Based on the last few times AAPL has had a large rally ahead of earnings, I think it makes sense to take a thoughtful approach to AAPL earnings. Even if the trader thinks AAPL is going to rally off of a new IPAD announcement (btw AAPL usually sell off after they announce products too), the risk reward is not there. At this point, the longs are already almost 20% off the lows.
What about those who are CONVINCED that AAPL is going higher? It still does not make sense to own the stock outright. I pulled up the current cost of insurance in AAPL options. It is at the lowest levels in 6 months and well below where AAPL options can trade ahead of an earnings announcement
graph from LiveVol (R)
For traders that think this stock is going to the moon, sell the stock and buy calls. This will limit loss exposure, while still giving the trader upside. On the flipside, traders that do not wish to take a large capital gain on AAPL should consider buying puts at these option levels.
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