To The Moon

As one of the largest companies by market cap in the US, $Apple(AAPL)$ is always in the spotlight, and its earnings report is the cherry on top. Apple's latest financials are due after the bell on August 1st, potentially signaling a sweet trading or investment opportunity.

Last quarter, Apple reported better-than-expected results and announced a massive $110 billion share repurchase plan, sending its stock soaring nearly 6% post-earnings.

According to Bloomberg consensus estimates, Apple's core iPhone business is projected to generate $38.947 billion in revenue, down 1.82% YoY and 15.26% QoQ, potentially marking two consecutive quarters of declines.

In other segments, Mac sales are expected to outperform the overall PC market, with revenue of $6.976 billion, up about 2% year-over-year and down 6% sequentially. Wearables, home and accessories revenue was $7.792 billion, down approximately 6% year-over-year and 1.5% sequentially.

The real stars are Services and iPad. Services, the most profitable segment accounting for 20% of total revenue, continues to thrive. iPad sales are also showing signs of recovery, projected to hit $6.629 billion, with double-digit year-over-year and sequential growth. Driven by growth in App Store sales and subscriptions, services revenue is expected to be $23.956 billion, up 12.93% YoY and slightly up QoQ.

This earnings season, the market will be laser-focused on iPhone sales in China, AI advancements, and any updates on the iPhone 16.

1. How did Apple perform on earnings days?

Looking back at the past 12 quarters, Apple's stock has risen on earnings day roughly 58% of the time, with an average move of ±3.6%, a max drop of -4.8%, and a max gain of +7.6%.

Currently, Apple's implied move is ±4.5%, suggesting options traders are betting on a 4.5% swing post-earnings. In contrast, Apple's average post-performance stock price change in the first four quarters was ±3%, indicating that stock price volatility will increase after this performance.

For Apple's earnings play, traders can capitalize on the expected volatility with a straddle strategy.

2. What's a Straddle Strategy?

A long straddle involves buying out-of-the-money call and put options simultaneously. The call's strike price is above the current stock price, while the put's strike is below. This strategy has huge profit potential: if the stock rises, the call gains theoretically unlimited upside; if it falls, the put profits. Risk is limited to the premiums paid for both options.

A short straddle, on the other hand, involves selling out-of-the-money call and put options. It's a neutral strategy with limited profit potential. It profits when the stock trades within a narrow range between breakeven points. Max profit equals the premiums received minus transaction costs.

3. $Apple(AAPL)$ Short Straddle Example

Based on Apple's average ±3% post-earnings move over the last four quarters, and its current price of $223.8, here's how to execute a short straddle:

Step 1: Sell a call option with a strike price of of $240 and a premium of $23.

Step 2: Sell a put option with a strike price of $202.50 and a premium of $25.

In this deal, the investor received a total of $48 in premium, but in exchange for his obligations. The first is the obligation that comes with selling a put option, which allows the buyer to sell the Apple to the investor at any time for $202.50. The second is the obligation to sell the call option, in which the investor must meet the demand of the call buyer at any time, delivering the Apple to the buyer for $240.

To profit, $Apple(AAPL)$ 's closing price must stay between $202.02 (202.5-0.48) and $240.48(240+0.48) (excluding commissions), with a maximum profit of $48. Losses can mount significantly if the stock closes well below $202.02 or above $240.48 after the earnings report.

The basic idea of volatility trading strategy is to construct an option strategy to offset the impact of other factors on option prices, leaving only the impact of volatility on option strategy, so as to realize volatility trading of stock options.

In summary, the straddle strategy is suitable for those who expect market volatility but are unsure of the direction, and want to reduce the cost of traders, although each time to obtain a small royalty, but the strategy itself is very high win rate, and in terms of annualized returns to calculate the throw is very impressive.