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Apple (AAPL) Throws Us A Curve Ball!

AAPL changes it’s earnings release date, which sends implied volatility on the January options through the roof!

Image representing Apple as depicted in CrunchBase
Image via CrunchBase

As a part of my due diligence, I always check the earnings release date for a company before structuring any trades. Apple (ticker: AAPL), is a wonderful technology company that many of us here it OptionsANIMAL really like to trade. Typically we find good premium in the options and we believe that the fundamentals of this company are rock solid. Apple has done what a technology company should do, they continue to innovate. So for the month of January, I had decided, based on my due diligence, to sell verticals well out of the money with very low probability of being touched. When I had checked the earnings release date for Apple, it was listed as 24 January after the market close. That’s after the January options expire.

So it seemed the perfect time for me to play some Bull puts and some Bear calls around AAPL. As our students know here ait OptionsANIMAL, one of the most important things that we need to be aware of when structuring trades is a company’s earnings release date. The earnings release date is a fundamental event, and we know that fundamental events can and often do change the technical trend that the equity might have trended in.

Everything was going along just fine until Monday morning 27 December. When the market opened, both my short calls and short puts went up dramatically in value. My short puts, which were strike 300, went from a bid value of $.56 to a bid value of $1.27! That’s over a 125% increase in value on a day where the stock went higher in value. My short calls, at strike 360, also went up in value. They went from a bid value of $1.72 to a bid value of $2.45! About a 45% increase.

I knew that this meant that the Market Makers were now expecting some volatile future movement in the stock during the life of these options. So I double checked my due diligence first on the earnings release date, and still found to be listed as 24 January. So that couldn’t be it. I continued my research and really didn’t find much of anything except for a potential lawsuit filed against Apple alleging that Apple was collecting private data about its consumers through its iPad and iPhones. ( “Apple sued over data given by iPad, iPhone”, Read more: Apple sued over data given by iPad, iPhone | Sacramento Business Journal ).

It hardly seemed that this lawsuit over Apple allegedly collecting information about consumers and reselling it to other companies was the cause of such an increase in volatility. If anything, that would change the price of the stock and the stock went up not much but a little. Also, it seemed unlikely that the Market Makers would just be running some sort of the scam to try to make more money on the Apple options. There had to be some reason that the market is expecting increased volatility in Apple.

On Tuesday, I continued my search to find the reason that there was such an increase in the price of apples options for the month of January. I still found nothing. It wasn’t until Wednesday morning, today, that during my due diligence while looking at briefing.com’s website; (http://www.breifing.com), that I finally got my answer. Over the course of the Christmas holiday weekend, Apple had changed its earnings release date from 24 January after market closed to 18 January after market close. This meant that all of my short options in the month of January would now be exposed to a fundamental event. Bummer

So, while there are still fully three weeks until Apple’s earnings event, I will have to watch these trades closely.

In level one of our education, we spend a lot of time talking about due diligence. Understanding the company’s fundamentals, developing an expectation of trend based on technical analysis, understanding the market sentiment towards the underlying equity all of which help us to develop an expectation of future movement of the underlying equity. Nonetheless we cannot control nor can we expect extemporaneous events or changes made by the Corporation. Therein lies the reason that we spend so much of our time discussing our secondary exit points. Not only do we discuss the potential adjustments that we might make to a trade, but we also need to make sure that should there be a need for more capital to follow through on those secondary exits, that we do in fact have that capital available.

In conclusion, I suspect that their others out there who are in a similar situation. With credit trades; perhaps bull puts, perhaps bear calls, perhaps iron condors, perhaps even butterflies that are now in danger of going to their secondary exits. This is a perfect example of the need for us to practice appropriate portfolio management. At least in a situation like this, by using portfolio management, we can reduce our overall exposure to the unforeseen events such as this one.

I wish you all the best in your trading, a healthy and prosperous new year, and the never-ending quest to learn more about the craft that you are practicing.

Jeff McAllister
OptionsANIMAL Instructor

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