Schaeffer's Trading Floor Blog

Projecting Post-Earnings Moves in Apple Inc. (AAPL), McDonald's, and Netflix

How the current options market is pricing earnings reactions in AAPL, MCD, and NFLX

by 1/23/2013 7:45 AM
Stocks quoted in this article:

For the 99.9% of us not in Davos, it's Earnings-Palooza this week!

First up, we have Apple Inc. (NASDAQ:AAPL - 504.77), set to report tonight after the close. You have probably heard a word (or 5,000) about the stock's price action. It peaked at $705 right at the autumnal equinox and has dropped pretty steadily since. The most amazing fact, of course, is that the market has managed to advance despite the gravitational tug of having its largest component get plowed.

The options board is pricing in about a 6% earnings move, which seems pretty much in line historically. Last quarter saw literally no movement on earnings, but the July 2012 quarter saw a 4.5% drop on the number. Looking back to April 2012, Apple dropped 10% after earnings. I tend to look for reactions in the same direction as the overall trend in the stock, but the April 2012 drop in AAPL was in the context of a long-term uptrend (remember those days in AAPL?).

Meanwhile, open interest in AAPL is at All-Time Highs! It sounds great, but this is as much a function of adding more and more expirations to the max. Apple already lists a weekly option for each week out through regular February expiration. The tilt towards calls is high, though. Since the last earnings report, call open interest has increased about 10%, whereas put open interest is roughly unchanged. The stock's Schaeffer's put/call open interest ratio (SOIR) sits at 0.55, a multi-year low.

So, you have a downtrending stock and relatively large demand for calls. This backdrop suggests everyone wants to fade the move. Crowds aren't always wrong, but that's a pretty strong lean.

Next, we'll move our Wi-Fi over to McDonald's Corporation (NYSE:MCD - 92.95), where (incidentally), I'm not having the mushroom Swiss Angus Burger anytime soon after reading the calorie content. The stock has had a nice rebound over the past couple of months, up from $83 in mid-November to near $93. Of course, that's just making up for the drift in the early part of 2012 -- net-net, MCD hasn't moved since last May.

The options marts expect a 2% move in MCD. It dropped 3% on the last earnings day open, and 2.5% on its July earnings, so this anticipated move would represent a lesser reaction.

Like AAPL, MCD has seen a relative surge in call volume. But unlike AAPL, it is consistent with the trend in the stock itself and not so noteworthy.

And finally, we save the best for last Netflix, Inc. (NASDAQ:NFLX - 97.81). Mr. Options Market is looking for a reaction of nearly 11%. And unlike the other two stocks profiled today, there's relatively high interest in the puts. Given that NFLX has risen about 70% since September, that's the exact opposite dynamic as AAPL. Option players are buying puts into an uptrend.

You get what you pay for. Or, in this case, you risk what you sell for (something like that). NFLX has a history of huge earnings reactions, in both directions. Just last July, NFLX gapped down 20% on earnings, then dipped another 5% intraday.

Disclaimer: The views represented on this blog are those of the individual author's only, and do not necessarily represent the views of Schaeffer's Investment Research.


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