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

  • IVolatility Tools: Advanced Options

    Perhaps the toughest part of trading options is figuring out what to do. For this we have advisors, seminars, newsletters and more. Yet, one tool that all investors need, but few utilize adequately, is data. This concept is parroted across the industry, but how does the average investor move from the desire to utilize data to the actual practice?

    By Levi Ioffe,

    • 2 comments
    • 428 views
  • A Global Equity Put Write Portfolio

    Many that sell equity market put options focus on the S&P 500 (SPX, XSP, SPY). Some will add small caps by selling puts on the Russell 2000 (RUT, IWM). An investor could also make their put selling strategy globally diversified by adding MSCI EAFE (EFA) and Emerging Markets (EEM).

    By Jesse,

    • 0 comments
    • 350 views
  • The Random Walk Hypothesis

    The “random walk hypothesis” (RWH) is one idea about how stock prices behave – but only one of many. It is a theory promoted in academia and believed in my many, but not so much by traders involved with handling real money. Theories aside, is the market truly random?

    By Michael C. Thomsett,

    • 0 comments
    • 368 views
  • How To Trade Options Successfully

    I’ve now been trading options for over a decade and been associated with Steady Options for seven years – hard to believe.  Over that period, I’ve learned quite a bit about option trading; how to improve, what not to do, and generally how the option markets work. I’m still learning.

    By cwelsh,

    • 3 comments
    • 686 views
  • January 2019 Performance Analysis

    No one likes losing money, and no one likes hearing "excuses". However, in an effort to be fully transparent, solicit feedback, and to improve our own performance, we're writing this article to do a further breakdown of the losses which our model portfolio incurred in January 2019. 

    By Kim,

    • 17 comments
    • 1,482 views
  • Island Clusters as Strong Reversals

    Options traders constantly seek the elusive reliable reversal signal. A few unusual but strong reversals are worth looking for, and their patterns reveal likely exceptional timing for opening or closing option trades. One example of this exceptionally strong signal is the island cluster (or, island reversal).

    By Michael C. Thomsett,

    • 0 comments
    • 443 views
  • What’s Wrong With Your 401(k)? (If anything)

    There currently are over sixty million Americans that are active 401(k) participants, and well over 500,000 total active 401(k) plans offered by employers in the United States.  Despite these high numbers, usages could be higher, as the US Census Bureau estimates that only 41% of all employees with access to a 401(k) plan utilize it, with even less funding it fully.

    By cwelsh,

    • 0 comments
    • 526 views
  • Upcoming Decay of Options

    I am on the hunt for a short volatility position for three main reasons. First, the market’s wild swings have, for the time being at least, diminished. Second, option activity has dried up as my options barometer continues to be stuck in the 4 – 6 range as traders are not making big bets in either direction.

    By Jacob Mintz,

    • 0 comments
    • 626 views
  • The Scientific Process of Increasing Expected Returns

    For many US investors, the "base case" for equity investing is US large cap stocks, most commonly benchmarked as the S&P 500. You could absolutely do far worse than owning these 500 great US companies, and the weight of the evidence suggests that most actively managed mutual funds that benchmark themselves against the S&P 500 index have in fact done worse.

    By Jesse,

    • 0 comments
    • 1,081 views
  • Those Golden and Death Crosses

    The use of moving average (MA) for predicting future price behavior must be undertaken cautiously. MA is a lagging indicator, so the question must be: Can a lagging indicator provide guidance for the future? Yes. The use of two MA lines and how they interact is a reliable form of reversal indicator.

    By Michael C. Thomsett,

    • 0 comments
    • 732 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