Apple Stock Options Price In Lofty Pre-Earnings Expectations

Bullish sentiment surrounds Apple ahead of earnings, which could leave the stock vulnerable

Nov 1, 2017 at 11:35 AM
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Apple Inc. (NASDAQ:AAPL) will report fiscal fourth-quarter earnings after tomorrow's close -- capping off a recent stretch of big-cap tech earnings. The iPhone maker has a mixed history of earnings reactions, with the stock closing lower the day after Apple reports in four of the past eight quarters. Most notably, AAPL shares logged back-to-back next-day losses in excess of 6% in early 2016, though last quarter the equity added 4.7%. This time around, the options market is pricing in a single-session post-earnings move of 7.1%, regardless of direction, based on at-the-money implied volatility data.

On the sentiment front, expectations are high ahead of earnings -- which leaves AAPL stock vulnerable to downside in the event of another negative earnings reaction. Of the 29 analysts covering the shares, 23 maintain a "buy" or better rating, while the average 12-month price target of $175.30 stands in uncharted territory.

Short sellers, meanwhile, nearly exhausted their buying power in recent reporting periods. Specifically, short interest plunged 13.51% from mid-September to mid-October, with just 34.24 million Apple shares now sold short. This represents a slim 0.66% of the stock's available float, and would take just two days to cover, at the average pace of trading.

This optimism is seen in the options, pits, too. Over the past 10 sessions, traders at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) have bought to open 360,019 calls on Apple, compared to 161,269 puts. The resultant call/put volume ratio of 2.23 ranks higher than 71% of all comparable readings taken in the past year, pointing to elevated demand for long calls relative to puts.

Drilling down, the out-of-the-money December 210 and January 2018 170-strike calls have seen the biggest increases in open interest over the past 10 days, with 66,552 contracts collectively added. The 170 strike is hot today, too, with traders targeting the call option in the weekly 11/3 series, which expires at this Friday's close.

There looks to be a mix of buy- and sell-to-open activity here, with those purchasing the calls expecting a break to the upside by week's end. Those writing the calls are betting on $170 to serve as a short-term ceiling. Also in focus is the November 160 call, where it looks like new positions are being purchased.

With Apple earnings looming, short-term volatility expectations are on the rise -- as evidenced by the stock's 30-day at-the-money implied volatility of 29.2%, a 52-week high. This means its getting relatively expensive to buy premium on near-term AAPL options.

However, long puts currently represent the better "deal," based on the stock's 30-day implied volatility skew of 1%, which ranks lower than 96% of all comparable readings taken in the past year. In other words, puts are pricing in lower volatility expectations, relative to calls.

Looking at the charts, Apple stock topped out at a record high of $169.94 earlier, but has since swung 1.1% lower to trade at $167.15. This pullback isn't entirely surprising, considering the equity's 14-day Relative Strength Index (RSI) closed last night at 75 -- in overbought territory.


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