That is a question on many traders' minds. Investors in Apple have been richly rewarded for the last several years. Shortly after Google went public, the financial news was always focused on Google. Google was a Wall Street darling. And the people investing in Google in those early years did very well. But during several of those years, Apple's stock price was quietly outperforming Google.
But everything changed after the earnings announcement from Apple last fall. Suddenly, the talking heads on CNBC were all making pessimistic predictions about Apple. To be sure, Steve Jobs' death is a significant loss for Apple. I recently read his biography and it confirms the critical role Steve played in many of the greatest innovations to come out of Apple. But the book also highlights many of the talented designers and engineers Steve hired for Apple, including Tim Cook, the current CEO. After all, we are talking about a company with a market capitalization of over four hundred billion dollars! One man doesn't make or break an organization of that size.
Apple's Business Prospects
The iPhone and iPad continue to lead their respective markets. Sales of the iPhone4s have exceeded analysts' expectations. The openings of the new iPhone4s sold out in a matter of hours in many locations. And none of these sales were included in the last quarter's earnings. The iPhone and iPad have also pulled through sales of the Macintosh computers. Many pundits are predicting the end of personal computers in favor of smart phones and tablets, but Mac sales are up. If you have any doubts about the health of Apple's business, visit your local Apple store; you can barely get through the store near my house - it is always packed with customers. This certainly isn't a thorough analysis of Apple's financials, but my point is simply this: Apple's upcoming earnings announcement will be very positive by all measures.
However, earnings announcements aren't judged strictly by comparison with the previous quarter's results. They are judged by comparison with the analysts' expectations. That is why it is exceedingly difficult to predict the market's reaction to an earnings report. And given all of the negative chatter about Apple, one has to wonder how the market will react to this upcoming earnings announcement. And that leads us to the most important question.
How Should We Trade Apple?
Apple is scheduled to announce their quarterly earnings after the market closes on January 24. A trader could take several different approaches to this announcement; some differ based on style; some depend on the trader's prediction for Apple's share price after the announcement. But remember: trading any earnings announcement is very speculative. Don't bet your IRA on this trade!
One possibility is the straddle. As of today's prices, the $420 straddle would cost $3,028. The trader profits for a price move either higher than $450 or lower than $390. The fundamental question for the trader is whether she believes Apple's share price will move that far after the announcement. The one certainty is that implied volatility will collapse after the announcement and the prices of these options will drop dramatically; a large stock price move, one way or the other, is essential to achieve a profit.
One might also trade the iron condor on Apple through the earnings announcement. For this trade, the critical decision is the placement of the spreads. I would ensure my spreads were positioned outside of one standard deviation and also outside the break-even prices from the straddle. I think of the straddle pricing as the market consensus of the farthest likely price move in either direction. If I were establishing the condor today, I would sell the 460/470 call spreads and the 370/380 put spreads. At today's prices, that would bring in a credit of $207 with a maximum gain of 26% if both spreads expire worthless. However, implied volatility will decline after the announcement and one may be able to close the condor early for a nice gain.
If you have a strong directional bias for Apple, then I would suggest playing the appropriate half of the iron condor, e.g., if you are bullish, use the 370/380 put spread. But what if you are strongly bullish and want to swing for the fences? Take a look at the Feb 460/470 bull call spread. This is the proverbial lottery ticket - it will only cost about $100 and could return $900 for Apple above $470. But Apple would not have to move nearly that far to achieve gains over 100%.
Best wishes for trading the Apple announcement!