The most anticipated earnings report of the season comes today when Apple Inc. (Nasdaq: AAPL) reports its fiscal Q4 results after the bell.
Our long-term outlook on Apple remains bullish. I see this stock going to $200 a share.
We'll hang on to AAPL and watch it grow. In the meantime, there are ways to score extra profits every quarter when earnings trigger short-term moves in Apple's share price. Last quarter, for example, my Money Calendar Alert members made as much as 175% on AAPL stock in the 11 days it took shareholders to book just 2.46%.
I spot these opportunities by studying price patterns before and after earnings reports. The best part is, with the right strategy, it doesn't matter which way the stock moves, just that it moves.
And from what my charts show me today, this is the perfect way to trade Apple at earnings time...
Tracking AAPL Price Moves Ahead of Earnings
While many options strategies are directional - relying on the underlying stock to go either up or down to be successful - some are non-directional. They just need the share price to move to pay off for the trader.
That's why earnings season is the best time of year for traders; reports trigger short-term jumps and dips in share price. And my option analysis tools can tell me a great deal of information about the behavior of stocks before and after their earnings over the last four quarters.
For Apple, Q4 earnings typically aren't the most interesting. They come out before the big holiday sales quarter, which is why January's Q1 report is the company's biggest.
But today's earnings report could have a bigger impact on AAPL stock than the usual Q4 release, as it will really give us an idea of what the consumer was thinking during the China crisis last month.
You see, not that long ago, there were concerns that China was going to put a dent in Apple's year-over-year growth potential.
Apple CEO Tim Cook assured investors it didn't. Cook said iPhone sales hit record highs in China.
But the stock market wasn't buying it. AAPL actually went down twice. Once was during the market's 1,000-point blip on Aug. 24, when it sunk to $92 from its previous close of $105.76, and again on Oct. 1, when it dropped almost 3% to $107.40.
In October, overall market sentiment and seasonal forces took over and pushed AAPL - and the majority of stocks - up above September highs. Friday was the real breakout day for Apple, as it stabbed above the resistance level of $117 to close at $119.08. Now AAPL has a chance to make it back to the July highs of $132.50.
This volatility is evident in Apple's chart - it's a tough one to read when it comes to price, unless you are looking at the week prior to earnings announcements...
AAPL's One Consistent Price Pattern
A look at this year's AAPL chart shows how price and volatility rise into earnings:
In April, AAPL rose 10 points the week ahead of the company's earnings report, and volatility about 15. In July, it was about the same.
AAPL rose about 10 points once again before trading started Monday. But volatility has hardly budged. I believe the stock was just waiting for options traders to kick in their bets yesterday and today.
But Apple's last two earnings reports point to an interesting shift...
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After release of the last two reports, Apple stock dropped immediately, along with volatility. Prior to that, it was a safe play that the stock would rise after earnings.
Is this a changing pattern - are we now going to resort to "buy the rumor, sell the news" with Apple, like with other stocks?
I can't say AAPL's bullish post-earnings pattern is gone just yet. Traders like me need things to happen in threes before we can decide if the pattern has changed.
But there is one pattern that's holding up 100% of the last four quarters - one that readers can collect gains on before Apple's next earnings release...
The Best Trading Strategy for AAPL Earnings
This pattern is buying at-the-money calls and puts (straddles) a week prior to earnings and then selling them just before the announcement.
The straddle is a non-directional trading strategy that can profit no matter which way a stock moves - so long as it moves.
The goal of this opportunity is to get a run up or down in the stock prior to the earnings and to get out the day before. In other words, you play the run up before earnings rather than the earnings themselves.
There are three steps to finding a straddle profit opportunity:
- Find a stock with an upcoming catalyst - any reason for it to move up or down.
- Buy an at-the-money call and an at-the-money put with the same strike price and expiration.
- This strategy may limit your returns, and 100% isn't always possible because of the low-risk nature of the trade. So be sure to set your profit targets and stick with them.
With AAPL, this trade has delivered a 12% return on average. It includes no directional risk and eliminates the earnings stress by being out before the announcement.
Stay tuned to Money Morning for more earnings-related profit opportunities and an update on how we'll use these patterns to profit from Apple ahead of next quarter's report.
Every week, Tom teaches his Power Profit Trades readers the ins and outs of simple, market-beating options strategies. You won't want to miss out on his next trade - click here to get Power Profit Trades in your email inbox twice a week at no charge.
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About the Author
Tom Gentile, options trading specialist for Money Map Press, is widely known as America's No. 1 Pattern Trader thanks to his nearly 30 years of experience spotting lucrative patterns in options trading. Tom has taught over 300,000 traders his option trading secrets in a variety of settings, including seminars and workshops. He's also a bestselling author of eight books and training courses.