Apple (AAPL) stock is up 11% over the past 12 months and slated to report fiscal fourth-quarter earnings, Thursday, Nov. 2, 2023, after the close. Between greater smartphone penetration in emerging markets and repeat sales to current customers, Apple has plenty of opportunity to reap the rewards of its iPhone business. We think Apple is still innovating with introductions of Apple Pay, Apple Watch, Apple TV, and AirPods; each of these could drive incremental revenue but more crucially help to retain iPhone users over time.
Our Recommendation:
Bull Put Spread (Credit Put Spread)
Rationale: The strategy focuses on capitalizing on the elevated implied volatility leading up to the earnings release. By selling a put below the current trading price and buying a further out-of-the-money put, you can collect a premium, which will be your maximum profit if AAPL stays above the strike of the sold put post-earnings.
How to Implement:
- Sell a Near-the-Money (NTM) or Slightly Out-Of-The-Money (OTM) Put: Choose a strike slightly below the current trading price, where you believe AAPL will remain above post-earnings.
- Buy a Further OTM Put: This acts as a hedge, defining the maximum risk of the strategy.
Advantages:
- High Probability of Profit: The stock can remain flat, move up, or even move down slightly, and you can still profit.
- Benefit from Volatility Crush: The drop in implied volatility post-earnings can make the options lose value faster, which is beneficial for a sold position.
Things to Consider:
- Earnings Surprise: Earnings results can be unpredictable. A significant drop in AAPL post-earnings could result in a loss.
- Position Size: Always size your position based on your risk tolerance.
Example:
- AAPL is currently trading at $170.29.
- Sell the $168 Put (slightly OTM). For the sake of the example, let’s say you collect a premium of $2.50.
- Buy the $163 Put (more OTM) as a hedge. Let’s say this costs $1.00.
- Net credit received is $1.50.
If AAPL stays above $168 post-earnings, both options expire worthless, and you keep the $1.50 credit. If AAPL drops below $168 but remains above $163, your profit decreases but remains positive until the price hits $166.50 (the sold put strike minus the net credit). Below $163, you reach the maximum loss of $3.50 (the difference between the strikes minus the net credit).
