- Playing Apple stock during earnings is a bad idea.
- Play Apple before or after the event.
- The best idea is to ignore earnings and focus on the company itself for the long-term.
It is a bit early for earnings type articles, but this needs to be stated to ween you off of bad habits.
One of the silliest ideas ever touted by finance professionals is buying a stock or options before earnings. It simply does not work on a consistent basis, and I see a lot of experts pop up claiming otherwise. There are a ton of earnings articles suggesting to buy the stock or options. Truth, which most will not admit, is that there is no way to predict a binary event. There is a way with unusual options activity, but that is a highly specialized skill which most fail at. I refuse to go this route after getting burned quite a few times in my early days of trading. Even one of the biggest authorities on options, Larry McMillian, states that less than 50% of unusual options activity will be profitable. So, listening to Najarian brothers on CNBC will probably make you lose your money fast. (Ah, now I get why the show is called 'Fast Money'.)
Getting back to Apple Inc. (NASDAQ:AAPL), what do you do for earnings? Sit on your hands and avoid the risky play altogether. Wait until after the earnings to decide whether or not to buy options? (See also: Apple Inc. (AAPL) Stock Will Rise Above $135 In 2017)
Well, there is a decent options strategy you could use going into earnings, but not during the event. Apple reports earnings on 1/24/2017. Typically, about 2 to 3 weeks before the date, check the trend of the stock and whether the volatility has been increasing. For instance, if you want to go long, the chart needs to show an upwards trend as it is currently doing.
(Source: Yahoo Finance)
I have not highlighted it in the 27 Jan 17 Apple options chains because it is too early, but there will be 1 or 2 strikes that might be concentrated with a lot of volume as the earnings date approaches and those are the strikes you may need to focus on. Those strikes will probably signal the maximum point of the move. If you decide to purchase options a little bit out of the money, your option value may not vanish. In fact, it might increase. The volatility of the option will increase as more uncertainty builds up towards earnings. Generally, Apple tends to run up into earnings. Buying the stock or option before earnings and getting out prior to the event is known as an earnings run play. It is much safer than holding the stock through the event.
General Options Understanding
If you want to buy options, it should typically be used in a non-binary setting. The probabilities should be in your favor. Depending on your time-frame, the strike, and expiration you choose can vary greatly.
For instance, the closer the option week expiration you select, the more in the money you want the option to be. You do not want to pay for time decay. You are looking for an option that will mimic the stock price around 90delta. This is where I will get some scoffs. Most people do not understand the concept of leverage. It is understandable given that media outlets tend to emphasize on returns. (See also: Apple Services: A Giant Is Growing Within Apple Inc)
When you buy an option, you are not trying to leverage returns. You are trying to leverage shares. For instance, paying 500 dollars to control 100 shares is better than dishing out 10000 dollars for 100 shares. If the stock moves up 50 cents to 1 dollar you have made 10 to 20% on your money versus 0.5% to 1. That is the power of leverage. That is how leverage is supposed to be used. Not the gambling way it is preached.
When the options experts talk of making 100% or more for returns, I wonder how they aren't fired. Those types of returns are unexpected but pretty exciting when they happen. It is extremely rare. Markets tend to range about 70% of the time and have a slow crawl upward. If you look at the price chart of Apple, you will notice that the stock does not have extreme moves. Thus, the gigantic returns are a pretty unreasonable expectation.
Purchase stock or Buy the option
If you want to purchase the stock for a long-term holding, then ignore the earnings announcement. The reaction will do nothing except give you more headache. Though I am not a fan of Buffett, I do like his simplicity. Just read Apple's 10-ks. You do not have to even invest in Apple stock if you do not understand the company. Invest in something else if it makes sense to you. You should not be focused solely on returns.
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