AAPL declares earnings and the market adjusts

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As I write this Greece defaults on debt to the IMF and sends its citizens into some uncharted waters.  The SPY is up .25 from the close so it is a safe bet for now that US stocks don’t care anymore.  The game is ending and is about to play out with a referendum this weekend.  It would not surprise me to see stocks start a rally again and end up at new highs after the labor reports this week.  Another surprise was the jump in AAPL IV on a down volatility day in the market.

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AAPL usually reports around the 4th week of the month and with the 4th week ending Jul 24th in this next earnings cycle..  There was some doubt if AAPL was going to report.  The earnings were confirmed today and a tidy jump in IV in the Jul 24 cycle.

There are lots of earnings plays and every once in a while they get interesting.  The AAPL was odd because the company is pretty steady about reporting.  Another factor is the reduced theta in an earnings trade if you can buy the IV cheap enough.  Essentially the market thinks the earnings are no big deal but they keep the prices low until a few weeks before the date.

We had an the AAPL trade on in our educational Strategy Letter and it worked out ok.  Sometimes a little long vega helps and the Greek crisis did not hurt.

The Lesson

Many stocks have relatively low IV levels into earnings.  Owning near the money options creates reduced price gamma and the lack of theta can create nice opportunities.

The Trade

I like MSFT as a long earnings straddle with the 44 strike very appealing on the Greek crisis.  The AAPL trade was nice but seems past now.

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Disclosure: MSFT positions

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