AAPL Ahead of Earnings


So as we head into Apple's earnings today it is very important that one not lose sight on where Apple stands at the current moment & how we are pretty well hedged to take advantage of both possibilities if AAPL were to gap up or down on the results.

If AAPL gaps up then our January 2018 110/120 call spread will increase significantly along with our July 100/110 call spread. However our goal is to get out of the July spread and get into a higher yielding call spread since the July spread was rotated into @ $8.10...we only have a about 23% of upside value achievable so long as AAPL closes at or above $110. The point in rotating into the July spread was to give us some exposure to more potential upside than the March was able to yield since we were able to sell that at about $9.40 for a 88% gain overall. If AAPL gaps down then the March spread will move down faster in value then the July spread would. So we wanted to offset that possibility, plus we were up significantly so it was a good time to take take profits.

Now the point to be aware of, because I understand that many will have a sensation of FOMO if AAPL gaps up and runs....and this is a very important point: It doesn't matter where AAPL runs to in price/share...the opportunity WILL come that we can get into a discounted spread when AAPL pulls back on the next cycle. Like AAPL could run to $130, top out and then retest the $120-$118 level and THAT would be the area where we would be buying a new spread. Not here where overbought conditions are at high extremes and when options prices are at a premium due to pre-earnings. Even if AAPL were to rally to $140 in 2months time...then we would be waiting for the next pullback and only do our buying when oversold conditions are reached...so if AAPL oversold looks like $125 off a pullback from $140 then that's where we would be buying. Options are always really expensive right before earnings. The best time to buy our new spread will be after earnings are behind us and we get either a run up rally that inevitably will pullback, or if we get a gap down on the results (less likely but always a possibility).

Some notes to consider: First, this current rally has gone on for 52-sessions since Apple bottomed out at $104 a share in mid-November. That is 17.73% in just this segment of the overall rally that Apple has been on since hitting a low of $90.54 on June 27. The overall 6-month rally which we adamantly and repeatedly argued would happen for weeks on end has gone on for a grand total of 35.23%. That's how much Apple has rallied these past 6-months. And believe it or not, that is the default for what we have seen in the past during the period of June to January. Remember, that in all but three years in the past 12-years, Apple has rallied just around 50%+/- during this seasonally strong period between June and January. We had a lot of strong reasons for believing this rally would happen, but now that we enter the first half of the year seasonality, which historically for Apple has begun just after reporting Q1 earnings, we need to be a little cautious. Think back to January 2006 for example. Apple had rallied nearly 100% from June 2005 to January 2006. It peaked literally on the day after it reported earrings and then suffered a 6-month long 40% correction where Apple bottomed exactly when it reported Q3 2006 earnings in July and kicked off a 100% rally up to $100 a share the ensuing January (from a low of $50 that July).

The point here is that Apple has come a long way both on the longer 6-month term and in the intermediate-term. If Apple were to gap-up and run on this earnings report -- a very real possibility -- it will be very easy to get caught up in notions and feelings of missing the boat. Don't succumb to those feelings. The fact remains that Apple has been overbought for over three weeks now. What's more, just last week it was trading near an 80-RSI. If Apple were to gap-up on this report, it would go even more overbought. There isn't a whole lot of room to the upside. And even if the rally were on fire, Apple isn't going to push right through its all-time highs that easily and when no profits have been taken. There are a lot of people who are holding large positions who are down on those positions and who purchased those positions in the 120's. They're going to be thinking about selling those positions as Apple rallies through the $120's. So there is a lot of overhead resistance.

So as I see it, things can go in one of a number of ways from here. First, Apple could gap-up to $125 tomorrow, hang around those levels and then eventually start to sell-off. It could gap-up to $125 in the AM and sell-off throughout the day closing near the lows of the sessions and eventually give up those gains and end up headlong in a correction taking it down to $115 a share. That's one possibility. The other would be to see Apple gap-up to $125 and then run over the next several days or weeks up to $130. If that's how things play-out, you can bet that there will be a correction at some point that tests $120 and even falls below. Like you can imagine a 10% correction putting Apple at $118 a share down from $130. And notice that holding up here to make a $10 gain between $120-$130 might seem like a good idea, but you take a huge risk holding when the stock has been this overbought and been on this long of a rally. It's too much of a risk for the potential gains. Whereas if you buy at a 30-RSI, you're setting up a high probability trade.

The other way this could go would be to see a sell-off. Now that would complicate things for us. Because a sell-off from here would need to be shallow in nature. It would need to be one of those $5-$7 pull-backs. Because if Apple falls to say $110 a share, it opens up the possibility of a double-top. People will start to suspect that Apple cannot get through the $120's. In fact, in many ways, it would be better for us if Apple did run to $130 and then correct down to $118. Because in that set of circumstances, I have very little doubt that Apple will take out its all-time highs eventually this year. But if Apple were to sell-off on this report and fall to $110 a share, it raises some concerns about whether Apple could get through the $120's. So a sell-off does make things a little tricky.

But the point here is that I wouldn't worry too much about Apple running without you and you missing the boat. Keep in mind we are very much long AAPL and hedged to capture the long side with our 2018 January 110/120 spread. All we need is AAPL to close at or above $120 by expiration and our position will gain a handsome 150%. So the stock that we sold at the lows and replaced for this spread will very much participate in the rally. But what we love about this spread is it's properly hedged to cover the downside risk if AAPL breaks down a bit and struggles for the year. Something we don't expect to happen, but that's what this spread is there for....is to still be able to deliver handsome returns even in a bear market environment. Believe me when I say, AAPL trading at only $120 by next year will be huge dissapointment and would have meant that we were in a bear market of some kind. AAPL at $120 a year from now would crush the PE ratio to the low 8. A value that hasn't been seen since the financial crisis. So just remember, AAPL trading at $120 today is entirely different than AAPL being @ $120 a year from now. It would actually be a massive haircut in valuation.

Apple has been overbought for quite a while now. There has only been one instance in history where Apple shipped off without you if you sold at a 70-RSI. And that was in Q2 2014 when it gapped-up after announcing its 7-1 stock split, blowout earnings and increased its divided and stock buyback. But in that case, Apple wasn't even overbought going into earrings. So you would have sold after the gap-up. Here, Apple has already been overbought for three weeks. So not a comparable situation.


Some of the greatest pearls shared by Jesse Livermore:

“Money is made by sitting, not trading.”

“The desire for constant action irrespective of underlying conditions is responsible for many losses in Wall Street even among the professionals, who feel that they must take home some money everyday, as though they were working for regular wages.”

“Buy right, sit tight.”

“Nobody can catch all the fluctuations.”

“There is a time for all things, but I didn’t know it. And that is precisely what beats so many men in Wall Street who are very far from being in the main sucker class. There is the plain fool, who does the wrong thing at all times everywhere, but there is the Wall Street fool, who thinks he must trade all the time. Not many can always have adequate reasons for buying and selling stocks daily – or sufficient knowledge to make his play an intelligent play.”

“It takes time to make money.”

“Don’t give me timing, give me time.”