To The Moon

Earnings reports from major tech giants are coming this week! The world’s highest market-cap company, $Apple(AAPL)$ , will announce its Q4 fiscal 2024 earnings (the third calendar quarter of 2024) after the market closes on October 31.

According to the latest analyst estimates, Apple’s Q4 revenue is expected to reach $94.316 billion, up 5.38% year-over-year, with an earnings per share of $1.53, a year-over-year increase of 4.77%. Breaking down by segment, Bloomberg's consensus forecasts are as follows:

• Hardware:

  • iPhone, Apple’s flagship product, is expected to generate $44.965 billion in revenue, representing a 2.65% year-over-year increase and a 14.42% sequential increase.

  • Mac revenue is projected at $7.749 billion, up 1.77% year-over-year and 10.6% quarter-over-quarter.

  • iPad revenue is expected to be $7.084 billion, a 9.94% year-over-year increase, with a 1% sequential decline.

  • Wearables, Home, and Accessories revenue is forecasted at $9.159 billion, down 1.75% year-over-year but up 13.12% quarter-over-quarter.

• Services:

  • Apple's highest-margin business, is expected to generate $25.269 billion, marking a 13.24% year-over-year growth and a 4.4% sequential increase.

Overall, Apple’s core iPhone segment is expected to return to growth this quarter after two consecutive quarters of declines, with services continuing to show strong momentum.

The strong performance of tech giants this year has been a major driver for the broader U.S. market gains. Apple’s share price has climbed more than 20%, setting a record high, and its market cap has surged to nearly $3.6 trillion. With the ongoing AI boom, Apple may be poised to reach new heights.

Over the past 12 quarters, the options market overestimated Apple stock's post-earnings price movement 58% of the time. The anticipated move after earnings averaged ±4.0%, while the actual average move was 3.6% (in absolute terms).

In light of Apple’s upcoming earnings event, investors can consider trading a short strangle strategy based on the historical volatility range of 3.6%.

What is a Strangle Strategy?

In a long strangle, investors buy both an out-of-the-money call option and an out-of-the-money put option. The call option’s strike price is above the underlying asset’s current market price, while the put option’s strike price is below it. This strategy has significant profit potential: if the underlying asset's price increases, the call option theoretically has unlimited upside, while the put option can generate profit if the price falls. The risk is limited to the premium paid for these two options.

In a short strangle, investors sell one out-of-the-money put option and one out-of-the-money call option. This neutral strategy has limited profit potential, with the highest profit achieved if the underlying stock price remains within the breakeven range. The maximum profit equals the total premium received from selling both options minus transaction costs.

Apple Short Strangle Strategy Example

With Apple’s stock currently trading at $230, an investor can implement a short strangle strategy with the following trades:

• Sell one call option with a strike price of $250 for a premium of $14.

• Sell one put option with a strike price of $207.5 for a premium of $13.

1. Income

• Call option premium received: $14

• Put option premium received: $13

• Total income = 14 + 13 = $27

2. Breakeven Points

The strategy’s breakeven points depend on the price range of Apple’s stock at expiration:

• Upper breakeven point: $250 + 0.27 = $250.27

• Lower breakeven point: $207.5 - 0.27 = $207.23

3. Profit and Loss Analysis

• Maximum Profit: If Apple’s stock price stays between $207.23 and $250.27 at expiration, both options expire worthless, and the maximum profit is $27.

• Maximum Loss: If the stock price moves outside the breakeven range, losses occur.

  • If the price exceeds $250.27, loss = stock price - $250.27

  • If the price falls below $207.23, loss = $207.23 - stock price

This strategy is more likely to be profitable if Apple’s stock price remains within the breakeven range ($207.23 to $250.27); a price movement beyond this range will result in a loss.