How I traded AAPL earnings last week

The following is a trade review from our Stockguy 22 Bull/Bear Report, a weekly newsletter that is filled with great trade ideas from several Stockguy22.com traders.

We had great success with all of our earnings trades last week. One of our particularly nice trades was on Apple Computers. I had noted that because of the surge in both volatility and volume prior to the actual earnings event, that it appeared that many of the longs in the name had likely given up on their “unbreakable” stock. Because of this, I was looking for a sell the news type of event on the name and would look to fade both the volatility pump and a negative reaction if it appeared. Here is a recap of the individual ideas I presented.

a) vol sell into eps – If the AAPL eps is indeed a non-event, then an at the money calendar spread would work very well. Look at placing one prior to its close on Tuesday, especially if volatility continues to come into the name.

AAPL closed at $406.13 prior to their report on Tuesday afternoon, so I played the at the money calendar spread using the 405 calls. For those unfamiliar with how this trade is structured, I bought 405 calls in AAPL that expired that week (April 26) and purchased an equal amount of calls that expire next week (May 3). The typical rationale behind this trade is that you want the premium in the current options to evaporate while the options you bought in the later month to hold on to some value. This spread was bought for a total debit of 1.20 per contract. While it often does not really matter whether you use calls or puts on this trade because your primary objective is to capture the volatility crush, in this case I chose calls because I wanted the option of being long in the event that AAPL would gap down as outlined in trade idea b.  Apple did indeed gap down, though not substantially and I was able to sell half of my position for 2.90 per spread for a gain of about 140%. The remaining portion of the trade was converted into a long position for the following idea by closing out the sold calls from this calendar and holding on to the May 405 calls.

b) catch the knife after eps – If AAPL disappoints on their report and everyone looking for fireworks gets their wish, look to fade the move after the dust clears the next morning. I would only be willing to put on a trade like this with options, particularly either this week or next week’s options and in small quantities in order to limit risk in case the weakness persists.

In last week’s free Saturday Webinar, I had mentioned that one of my favorite reasons for using calendar spreads is their versatility. Not only are they a great way to capture a volatility crush on a binary event, but because of the way they are structured, they lend themselves to legging in and out very well for the trader that patiently waits for opportunity to do so. This trade was a perfect example of when and how to do so. I noticed AAPL start to ramp up just before the open on Wednesday and because there was a chance that it would move explosively, the best way for me to enter a long position while also dealing with my current trade with the calendar spread from the previous idea was to close out the sold calls and hold my long portion into a move higher. Of course, the big risk in this type of trade is that it goes against you and either compounds your losses or erases a winning trade so this type of move should only be done if it is part of your current strategy, not as an on the fly type of way to recoup losses. However, because I had already closed out half of the trade for profits, I decided to go ahead and use the rest of the trade for this play. The gamble paid off spectacularly as AAPL surged higher at the open allowing me to pick up an 4 extra points of value on the remaining calls. By locking in the gains from the calls I closed in the morning and picking up the extra value on the calls I bought, this turned what was at the time just a 140% gain into a gain of over 800%!

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