Most Active Options Update: Apple (AAPL)

Apple Inc. option traders are gambling on an earnings win

Oct 20, 2014 at 1:18 PM
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The 20 stocks listed in the table below have attracted the highest total options volume during the past 10 trading days. Names highlighted are new to the list since the last time the study was run, and data is courtesy of Schaeffer's Senior Quantitative Analyst Rocky White. One name of notable interest today is tech titan Apple Inc. (NASDAQ:AAPL), which will unveil its highly anticipated quarterly earnings report after the close.

Most Active Options Table

Apple Inc. is 1.7% higher at $99.35, as traders react to the launch of Apple Pay and buy in ahead of earnings. Over the past eight quarters, AAPL has moved an average of 5% in the session subsequent to reporting, mostly to the downside. In fact, the equity has reacted negatively in five of the past eight quarters, resulting in an average one-day post-earnings loss of 1%. Nevertheless, option traders today are scooping up AAPL calls at a faster-than-usual clip.

So far, roughly 520,000 AAPL calls have changed hands -- more than twice the number of puts traded, and representing a 37% mark-up to the stock's average intraday call volume. In fact, the 10 most active strikes are calls expiring on or before Friday, Nov. 21.

Digging deeper, it appears some "vanilla" bulls are buying to open the weekly 10/24 103- and 104-strike calls, where implied volatility has popped by double-digit percentage points, and most of the calls have crossed on the ask side.

Digging deeper, however, it looks like one trader is taking a cautiously optimistic stance ahead of earnings, initiating a bull call spread at the weekly 10/24 102 and 103 strikes. Specifically, the speculator bought to open 1,861 102-strike calls for $0.77 apiece, then hedged her bets by simultaneously selling to open an equal amount of 103-strike calls for $0.53 each -- data confirmed by the International Securities Exchange (ISE) -- resulting in a net debit of $0.24 per pair of contracts.

The trader will make money if AAPL surpasses $102.24 (bought strike plus net debit) by Friday's close, when the options expire. However, her reward maxes out at $0.76 (difference between strikes, minus net debit) no matter how far AAPL should climb north of $103 this week.

Had the speculator simply bought the 102-strike calls, breakeven would be higher at $102.77 (strike plus premium paid), and gains would be theoretically unlimited to the upside. However, the trader would be risking the full $0.77 paid for the calls, as opposed to the maximum risk of $0.24 (the net debit) on the spread.

On the charts, AAPL has struggled to conquer the $102-$103 region, which emerged as a speed bump in mid-to-late August. Furthermore, the stock is now staring up at its formerly supportive 10-week moving average (located at $100.33), which could switch roles to act as resistance.

Despite the stock's technical turmoil, or its fundamental woes both in and out of the earnings spotlight, Apple Inc. (NASDAQ:AAPL) remains beloved by analysts. In fact, the security boasts 22 "strong buys" and five "buy" endorsements, compared to six lukewarm "holds" and not a single "sell." Plus, the consensus 12-month price target on the equity sits in uncharted territory at $112.64. Another negative earnings reaction could exacerbate recent selling pressure on the iParent.


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