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AAPL Option Traders Enthusiastic Ahead of Earnings

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Optimistic investors have bid up the share prices of Apple Inc. (AAPL) ahead of its fiscal second quarter earnings announcement. At first glance, it appears that option traders are anticipating a positive move, as the number of call options outweighs the number of put options in the open interest. The unusual option trading may create a strong downward trend in the price action if Apple delivers a negative earnings surprise.

A sizable amount of call options remain the open interest for AAPL, and option premiums are unusually high right now. The trading volumes indicate that traders have been buying calls and selling puts in anticipation of a positive earnings report. Unwinding these bets could result in unexpected downward pressure on the share price of AAPL.

It is difficult to accurately predict the direction a stock will move after earnings. However, a comparison between the stock’s option trading activity and the price action shows that, if Apple delivers a negative report, the company’s share price could fall significantly, moving closer to its 20-day moving average in the days after the announcement. This is possible because options are priced for a small upwards move, but unexpected poor news could catch traders off guard and create a rapid decline in share price.

Key Takeaways

  • Traders and investors have bid up Apple share prices to an extreme range headed into the earnings announcement.
  • The share price has been closing well above its 20-day moving average.
  • Call and put pricing is predicting a stronger upwards move.
  • The volatility-based support and resistance levels allow for a stronger move to the downside.
  • This setup creates an opportunity for traders to profit from unforeseen earnings results.

Option trading represents the activities of speculators attempting to profit from accurately forecasting unexpecting moves in an underlying stock or index, or investors who wish to protect their positions. That makes option trading a literal bet on market probabilities. By comparing the details of both option and stock price behavior, chart watchers can gain valuable insight, although it helps to understand the context in which this price behavior took place. The chart below illustrates the price action for the AAPL share price as of Friday, July 23. This created the setup leading into the earnings report.

Current Trends

The one-month trend of AAPL stock has the shares ascending into an extreme range. It is notable that, over the past month, the highest AAPL share price was near $148 in mid-July. The lowest share price was roughly $133 in late June. The price closed in the upper region depicted by the technical studies on this chart.

The studies are formed by 20-day Keltner Channel indicators. These depict price levels that represent a multiple of the Average True Range (ATR) for the stock. This array helps to highlight the way the price has moved to a higher range all month. This price move from AAPL shares implies that investors expect a positive earnings result.

Tip

The Average True Range (ATR) has become a standard tool for depicting historical volatility over time. The typical average length of time used in its calculation is 10 to 20 time periods, which includes two to four weeks of trading on a daily chart.

In this context where the price trend for AAPL has been rising to an extreme range, chart watchers can recognize that traders and investors are expressing optimism going into earnings. In the week before earnings, AAPL’s share price reached its all-time high, before slightly pulling back the following Monday and continuing to drift closer to that high. That makes it important for chart watchers to determine whether the move is reflecting investors’ expectations for a favorable earnings report or not.

Option trading details can provide additional context to assist chart watchers in forming an opinion about investor expectations. Recently, option traders are favoring calls over puts by nearly three to one, as the open interest on options has a greater number of calls than puts. Normally, this suggests that investors are expecting a positive earnings report, and traders appear to be expecting that AAPL will move higher after earnings.

Tip

The Keltner Channel indicator displays a set of semi-parallel lines based on a 20-day simple moving average and an upper and lower line. Because the upper lines are drawn by adding a multiple of ATR to the average and the lower lines are drawn by subtracting a multiple of ATR from the average price, then this channel indicator makes for an excellent visualization tool when charting historical volatility.

Trading Activity

Option traders recognize that AAPL shares are in an extreme range and have priced their options as a bet that the stock will close within one of the two boxes depicted in the chart between today and July 30, the Friday after the earnings report is released. The green-framed box represents the pricing that call option sellers are offering. It implies a 32% that Apple shares will close inside this range by the end of the week if prices go higher. The red box represented the pricing for put options with a 36% probability if prices go lower on the announcement.

It’s important to note that the open interest featured over 5.4 million active call options compared to roughly 3.9 million put options, demonstrating the bias that option buyers had, as well over half of the trades were call options. This amount normally implies that call option traders expect a jump in price. However, because the call box and put box are relatively equal in size, it tells us that the high percentage of call options traded has only mildly skewed expectations higher. A far more complacent outlook is implied.

The purple lines on the chart are generated by a 10-day Keltner Channel study set at four times the ATR. This measure tends to create highly correlated regions of strong support and resistance in the price action. These regions show up when the channel lines make a noticeable turn within the previous three months.

The levels that the turns mark are annotated in the chart below. What is notable in this chart is that the call and put pricing are in such a close range with plenty of space to run downwards compared to upwards. This suggests that option buyers don’t have a strong conviction about how the company will report, even though calls are being purchased over puts. Although investors and option traders do not expect it, a surprising report would push prices dramatically higher or lower.

These support and resistance levels show a large range of support and resistance for prices. As a result, it is possible that any news, surprisingly bad or good, will catch investors by surprise and could generate an unusually large move. After the previous earnings announcement, AAPL shares fell by 1.5% in the day following and continued to fall the following week, settling below the 20-day moving average for several weeks. Investors may not be expecting the same kind of move in the price after this announcement. With plenty of room in the volatility range, share prices could rise or fall more than expected.

Market Impact

As one of the biggest stocks by market cap and one of the heaviest weighted stocks in many exchange-traded funds (ETFs), Apple earnings can have a direct effect on index prices. No matter what the report says, it will likely have a significant impact on stocks in the technology sector. A positive report could lift other stocks in the sector such as Amazon.com, Inc. (AMZN), Google parent Alphabet Inc. (GOOG), or Microsoft Corporation (MSFT). It would also affect State Street’s Technology Sector Index ETF (XLK) and State Street’s S&P 500 Index ETF (SPY). 

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