SteadyOptions is an options trading forum where you can find solutions from top options traders. TRY IT FREE!

We’ve all been there… researching options strategies and unable to find the answers we’re looking for. SteadyOptions has your solution.

How NOT to Gamble on AAPL Earnings


An options trader said on CNBC to buy OTM call spread before AAPL earnings. The headline was Here's how I plan to quickly make 317% on Apple. Nice headline and nice way to attract viewers. But was it a good way to trade earnings or was it a pure gamble? We are about to find out.

"Todd Gordon of TradingAnalysis.com starts by pointing out that the tech giant is expected to rise or fall just $3.50 on earnings. Yet Apple moved more than the options market expected in the past two earnings events."

 

While this might be true for the past two earnings events, when you look at longer timeframe, AAPL tends to move less than expected. Take a look at the screenshot from optionslam.com, showing the post earnings movement of the stock in the last 10 cycles:

 

aapl.PNG

 

The last column shows the one day post earnings performance of the weekly straddle. As we can see, it has lost money 7 out of 10 times. Which means that 7 out of 10 times the stock moved less than expected. If I had to choose, I would take the other side of the trade (selling those options).

 

"Based on the charts, Gordon sees the stock going higher. Apple has been badly lagging its large-cap tech brethren of late, and he sees that trend tuning around."

 

Let me tell you a secret: when it comes to earnings, charts mean NOTHING. Earnings are unpredictable. reaction to earnings is even more unpredictable. 

 

So what was the recommended trade?

 

"He recommends buying the 101-strike weekly calls expiring on Friday, and selling the 102-strike calls. This trade will cost a total of 24 cents per share, and return a profit of 76 cents, or 317 percent, if Apple closes the week at $102 or above. "It's a little bit of a gamble," Gordon granted, "but we have an attractive reward-to-risk ratio."

 

My comments:

  1. It is true that the risk/reward is attractive. But risk/reward should be viewed in context with probability of success, as we discussed here and here. For example, if you buy 104/105 call spread, your risk/reward would be even better, but what is your chance to realize this reward?
  2. Based on the 102 calls deltas, the probability of AAPL closing above $102 this week was around 10%. Which means that this trade had only 10% probability of success.
  3. In order for the trade to succeed, you had to be right three times: direction of the move, size of the move and timing of the move.
  4. We know that earnings are always 50/50 (and we can see that in the last 10 cycles, AAPL moved 5 times up and 5 times down). 
  5. You needed around 6% move which is almost double the predicted move.

 

Considering all the factors, I consider this trade a pure gambling. In fact, Todd Gordon admitted that the trade is a little bit of a gamble - major understatement to me.

 

What would be an alternative to go bullish on AAPL before earnings? Well, if you were bullish but still wanted some margin of safety, you could sell weekly 92/93 put spread for $0.20. Your potential gain would be "only" 25%, but your probability of success would be over 80%. The trade makes money if the stock goes up, remains unchanged or goes down around 4%. You could be wrong and still make money. Again, lousy risk/reward but high probability of success.

 

AAPL is up 6% after hours as I write this. This trade might end up a winner (the price should hold above $102 till Friday). But does it mean it was a good trade? Not to me. Remember: not all winners are good trades, and not all losers are bad trades. Trading is all about probabilities. In this case, probabilities were not in our favor. Not even close.

 

We all know (at least I hope that you know) that CNBC's first priority is NOT to help you to make money. It is to maximize ratings and to attract advertisers. But sometimes their methods are highly misleading and unethical. Remember that when watching any of their programs.

 

Related articles:

Want to learn how to trade options in a less risky way?

 

Start Your Free Trial

 

What Is SteadyOptions?

Full Trading Plan

Complete Portfolio Approach

Diversified Options Strategies

Exclusive Community Forum

Steady And Consistent Gains

High Quality Education

Risk Management, Portfolio Size

Performance based on real fills

Try It Free

Non-directional Options Strategies

10-15 trade Ideas Per Month

Targets 5-7% Monthly Net Return

Visit our Education Center

Recent Articles

Articles

  • Option Equivalence

    Some option positions are equivalent – that means identical profit/loss profiles – to others. Others are not. A few days ago I had an inquiry from a person trading options in a restricted account (e.g. an IRA that did not allow marginable trades or short options positions):

    By cwelsh,

    • 0 comments
    • 97 views
  • Investment Ideas for Conservative Investors

    Investors with low willingness or need to take risks often look to bank and/or life insurance company fixed-rate products to increase potential returns instead of leaving their money in conventional checking or savings accounts. Some of these product types are CD’s, structured notes, fixed annuities and fixed indexed annuities.

    By Jesse,

    • 0 comments
    • 165 views
  • iVolatility Tools: Advanced Ranker

    Here is one of the analytical tools that allows us to claim "In options we are Big Data!" For those who want to find the movers and shakers, Advanced Ranker does the job. The Advanced Ranker combines an easy to use interface with a powerful sorting logic built on IVR and IVP.

    By Levi Ioffe,

    • 0 comments
    • 144 views
  • Two Pre-earnings Momentum Trades With a Technical Trigger in Alphabet

    Both option trading backtest approaches rely on the fact that there has been a bullish momentum pattern in Alphabet stock 7 calendar days before earnings. Further, we use moving averages as a safety valve to try to avoid opening a bullish position while a stock is in a technical break down, like the fourth quarter of 2018. 

    By Ophir Gottlieb,

    • 0 comments
    • 322 views
  • Flaws in Implied Volatility

    A technical study of chart patterns, focusing on historical volatility of the underlying, reveals that depending on implied volatility is a flawed idea. Traders should remember that options are derivatives, meaning their premium value is derived from historical volatility.

    By Michael C. Thomsett,

    • 0 comments
    • 396 views
  • 7 Trading Cliches For Novice Traders

    Trading is a tough business. There is no easy money in the stock market, but there are a lot of folks who will easily take your money. What is important to know that no matter how experienced you are, mistakes will be part of the trading process. This article should help you to avoid some of those mistakes.

    By Kim,

    • 0 comments
    • 365 views
  • Iron Condor vs. Iron Butterfly

    Iron Condor and Iron Butterfly are both very popular strategies. Both of them are usually used as non-directional strategies (although butterflied can be used as a directional trade as well). Both trades are vega negative and gamma negative, but there are also few important differences between those two strategies.

    By Kim,

    • 0 comments
    • 368 views
  • Leveraged Anchor: A Three Month Review

    Steady Options has now been tracking the Leveraged Anchor from the unlevered version for three months.  The results so far have substantially beat expectations, though there is a possibility for improvements discussed at the end of this piece. 

    By cwelsh,

    • 10 comments
    • 1,076 views
  • How a Fund is Developed

    Many individuals are curious as to the testing process for a new fund.  With the plethora of funds continually being developed, having some insight into this process can be helpful for investors.  At the very least, it can provide a series of questions which should be asked in conducting due diligence on fund managers.

    By cwelsh,

    • 0 comments
    • 295 views
  • Why Dow Points Are Meaningless

    A quick online search for “Dow rallies 500 points” yields a cascade of news stories with similar titles, as does a similar search for “Dow drops 500 points.” These types of headlines may make little sense to some investors, given that a “point” for the Dow and what it means to an individual’s portfolio may be unclear.

    By Kim,

    • 0 comments
    • 332 views

  Report Article

We want to hear from you!


Yes he was. But final result does not necessarily mean the trade was good. AAPL stock had its nest day in 2 years - http://money.cnn.com/2016/07/27/investing/apple-stock-soars-earnings/. Could you really predict this before earnings?

Here is the most disturbing part: someone replied to Todd Gordon on Twitter:

Capture.PNG

Next time he recommends something like this, some novice traders might really do more contracts, not understanding the probabilities, and lose their shirts.

Share this comment


Link to comment
Share on other sites


Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account. It's easy and free!


Register a new account

Sign in

Already have an account? Sign in here.


Sign In Now

Options Trading Blogs