Schaeffer's Trading Floor Blog

Pessimism Builds On Apple Inc. (AAPL) Ahead of Earnings

Apple Inc. will unveil its quarterly earnings results after tomorrow's close

by 4/22/2014 9:31 AM
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Earnings season has kicked into high gear, with roughly one-third of companies in the S&P 500 Index (SPX) reporting this week. Tech titan Apple Inc. (NASDAQ:AAPL) is one of those names, and ahead of tomorrow night's scheduled event, option traders have been bearishly aligning themselves as they brace for another poorly received report.

At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), for example, the stock's 10-day put/call volume ratio of 0.77 ranks higher than all other readings taken in the past year. Simply stated, puts have been bought to open over calls at an annual-high clip in recent weeks.

In a similar vein, AAPL's Schaeffer's put/call open interest ratio (SOIR) of 0.96 also ranks in the top percentile of its annual range. In other words, short-term speculators are more put-heavy now than at any other time during the past 12 months.

On Monday, put players targeted the May 520 strike, where 4,076 contracts changed hands. However, the volume was split on both the bid and the ask sides, meaning this put saw a mix of selling and buying activity, respectively. Open interest rose overnight, confirming the addition of new positions, and data from the ISE corroborated that both short and long positions were initiated.

By selling to open the puts, speculators believe AAPL will maintain its perch atop $520 through the close on Friday, May 16, when front-month options expire. Conversely, by buying to open the puts, the expectation is for Apple to surrender its footing atop the strike price -- a scenario witnessed as recently as last Thursday.

In any event, premium on AAPL's short-term options is relatively inexpensive at the moment, despite an earnings report looming on the horizon. In fact, the equity's Schaeffer's Volatility Index (SVI) of 24% ranks lower than 71% of similar readings taken over the past 12 months. Plus, the security's Schaeffer's Volatility Scorecard (SVS) reading of 76 suggests AAPL tends to make oversized moves, relative to what the options market has priced in.

Outside of the options pits, sentiment is split -- although it leans toward the bullish side. Among the brokerage bunch, no fewer than 28 covering analysts have levied a "buy" or "strong buy" recommendation toward AAPL, compared to nine "holds," and not a single "sell." Meanwhile, the consensus 12-month price target of $594.39 stands at a nearly 12% premium to the equity's current perch at $531.17.

Elsewhere, short interest jumped 7.5% in the latest reporting period, but still only accounts for 2.5% of AAPL's available float. It would take less than three sessions to cover these shorted shares, at AAPL's average daily pace of trading.

If history is any indicator, Apple's post-earnings price action favors option bears. Although Apple Inc. (NASDAQ:AAPL) has bested analysts' bottom-line estimates in six of the past eight quarters, the stock has shed an average of 1.8% in the subsequent session. What's more, following its last turn in the confessional in late January, the equity surrendered 8% the day after reporting. For AAPL's fiscal second quarter, Wall Street has forecast a per-share profit of $10.18 -- a 9-cent improvement over the company's year-ago results.

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