AAPL Option Traders Enthusiastic Ahead of Earnings

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AAPL Option Traders Enthusiastic Ahead of Earnings

Apple Inc. (AAPL) share prices have risen ahead of the company’s fiscal second quarter results release. At first look, it seems like option traders are expecting a bullish move, as the number of call options in the open interest exceeds the number of put options. If Apple reports a negative earnings surprise, the extraordinary option activity might cause a severe downward trend in price movement.

A significant number of call options remain outstanding for AAPL, and option premiums are exceptionally high right now. According to the trading volumes, traders have been buying calls and selling options in expectation of a favorable earnings release. Unwinding these bets may result in unanticipated negative pressure on AAPL’s share price.

It is tough to forecast which way a stock will move following results. A comparison of the stock’s option trading activity and price movement, on the other hand, reveals that if Apple releases a bad report, the company’s share price might fall dramatically, moving closer to its 20-day moving average in the days after the announcement. This is feasible because options are priced anticipating a little upward movement, but unexpected bad news might take traders off guard and result in a large drop in share price.

Key Takeaways

  • Traders and investors have pushed up Apple stock to an all-time high ahead of the earnings report.
  • The stock’s closing price has been much higher than its 20-day moving average.
  • Call and put prices indicate a bigger upward movement.
  • Support and resistance levels depending on volatility allow for a bigger move to the negative.
  • This arrangement provides traders with the possibility to benefit on unexpected earnings outcomes.

Option trading refers to the activity of speculators seeking to benefit by precisely projecting unexpected swings in an underlying stock or index, as well as investors seeking to safeguard their holdings. As a result, option trading is essentially a wager on market probabilities. Chart watchers may acquire significant information by analyzing the intricacies of both option and stock price behavior, albeit it helps to understand the context in which this price behavior occurred. The chart below depicts the price movement of the AAPL share price on Friday, July 23. This resulted in the setting for the earnings report.

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Current Trends

The one-month trend of AAPL stock has the shares ascending into an extreme range. It is notable that, over the past month, the highest AAPL share price was near $148 in mid-July. The lowest share price was roughly $133 in late June. The price closed in the upper region depicted by the technical studies on this chart.

The indicators used in the research are 20-day Keltner Channel indicators. These are price levels that are multiples of the stock’s Average True Range (ATR). This array serves to emphasize how the price has shifted to a higher range over the month. This price movement in AAPL shares indicates that investors anticipate a strong earnings outcome.

Tip

The Average True Range (ATR) has become a widely used technique for illustrating historical volatility over time. The average amount of time employed in its computation is 10 to 20 time periods, which comprises two to four weeks of everyday trading.

In this environment, where the price trend for AAPL has been climbing to an extreme range, chartists may see that traders and investors are optimistic about earnings. AAPL’s share price hit an all-time high in the week before results, before pulling back somewhat the following Monday and continuing to trend closer to that high. As a result, chartists must decide if the change reflects investors’ expectations for a positive earnings release or not.

Option trading information may help chart viewers generate an impression about investor expectations by providing more context. Recently, option traders have favored calls over puts approximately three to one, since there are more calls than puts in open interest. Normally, this indicates that investors anticipate a favorable earnings report, and traders tend to anticipate that AAPL will rise following results.

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Tip

The Keltner Channel indicator shows a series of semi-parallel lines based on a 20-day simple moving average, as well as an upper and lower line. Because the higher lines are produced by adding a multiple of ATR to the average price and the lower lines are drawn by subtracting a multiple of ATR from the average price, this channel indicator is an ideal visualization tool for displaying historical volatility.

Trading Activity

Option traders have priced their options to wager that AAPL shares will close inside one of the two boxes illustrated in the chart between now and July 30, the Friday after the earnings report is announced. The price offered by call option sellers is shown by the green-framed box. If prices rise, it suggests a 32% chance that Apple shares will finish inside this range by the end of the week. The red box reflected the pricing for put options, which have a 36% chance of being exercised if prices fall after the announcement.

It’s worth noting that the open interest included almost 5.4 million active call options vs about 3.9 million put options, illustrating the bias that option purchasers had, since call options accounted for more than half of all transactions. This quantity often indicates that call option traders anticipate a price increase. However, given the call and put boxes are almost the same size, we may conclude that the large number of call options exchanged has only moderately raised expectations. A significantly more relaxed attitude is conveyed.

A 10-day Keltner Channel analysis set at four times the ATR yielded the purple lines on the chart. This metric creates closely connected price action zones of strong support and resistance. These areas appear when the channel lines have made a noteworthy turn during the last three months.

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The levels marked by the turns are noted in the chart below. What stands out in this chart is how close the call and put prices are, with lots of room to go downwards as opposed to upwards. Even if calls are being bought over puts, this shows that option purchasers do not have a strong confidence about how the firm will report. Although investors and option traders may not anticipate it, a surprise report might cause prices to surge or fall drastically.

These support and resistance levels demonstrate a wide variety of price support and resistance. As a consequence, any unexpectedly positive or unfavorable news might take investors off guard and result in an abnormally significant shift. AAPL shares plummeted 1.5% the day after the last earnings report and continued to decrease the following week, closing below the 20-day moving average for many weeks. Investors may not anticipate the same type of price movement after this news. With so much opportunity for movement in the volatility range, share prices may increase or fall more than predicted.

Market Impact

Apple profits may have a direct impact on index prices since it is one of the most valuable companies by market capitalization and one of the most heavily weighted equities in many exchange-traded funds (ETFs). Whatever the study says, it will almost certainly have a substantial influence on technology stocks. A good report might boost other companies in the industry, including Amazon.com, Inc. (AMZN), Alphabet Inc. (GOOG), and Microsoft Corporation (MSFT).It would also have an impact on State Street’s Technology Sector Index ETF (XLK) and its S&P 500 Index ETF (SPY).

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