Apple (AAPL) Option Traders Bearish After Earnings

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Apple (AAPL) Option Traders Bearish After Earnings

After Apple Inc. (AAPL) disclosed that it had clearly outperformed analysts’ estimates for its fiscal third quarter financial results, option traders are taking moves that indicate they believe the share price will fall in the future. This is hardly surprising given that the AAPL stock price declined 1.2% the day after the study was released.

Apple announced profits per share (EPS) of $1.30 and sales of $81.41 billion, beating analysts’ expectations of $1.01 and $73.30 billion, respectively. Despite the strong results, Apple’s stock dropped when executives cautioned that chip supply bottlenecks might damage iPhones and iPads this quarter. Investors had pushed up the share price before to the announcement, with a substantial amount of call options in open interest.

Option trading volumes revealed that traders were buying calls and selling puts; however, option activity after results implies that traders are gloomy about AAPL’s share price after the tech titan outperformed analysts’ expectations. This is because price action has just moved downward, but option activity indicates that traders are selling calls and buying puts.

When the price movement of option trading activity and stock prices on the days after earnings is compared, there is some indication that option traders may be gloomy. This is hardly unexpected given that AAPL’s stock slid 1.2% the day following results, falling below its 20-day moving average. Furthermore, put option activity rose while call option activity fell. This is possible because option traders think AAPL is now overpriced and will trend downward in the short future.

Key Takeaways

  • Traders and investors sold shares in AAPL after the earnings announcement, as the stock fell 1.2% the day after earnings.
  • The share price of AAPL closed below its 20-day moving average.
  • Put and call option activity appears to be positioned for the price to fall.
  • The volatility-based support and resistance levels allow for a stronger move downward than upward.
  • This setup creates an opportunity for traders to profit from a reversal in the earnings-based share price movement.

Option trading encapsulates the actions of investors seeking to preserve their holdings as well as speculators seeking to benefit by accurately anticipating unexpected movement in an underlying stock or index. Because option trading is a literal gamble on market probabilities—a wager made by traders who are, on average, more informed than other investors—the activities of these investors and speculators suggest a projection for the weeks ahead. Understanding the environment in which the pricing behavior occurred is critical to capitalizing on this understanding. The chart below displays AAPL share price activity on Friday, July 30, indicating the setup after the earnings announcement.

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Current Trends

Over the previous month, the stock trended in an extraordinary range, ending substantially above the 20-day moving average before plunging 1.2% the day following the news. The price settled in the center of the range shown 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 emphasizes how the price has reduced from the extreme to the medium level. This price movement in AAPL shares suggests that investors are not confidence in Apple’s share price in the future.

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.

Based on the price trend for AAPL sticking at the upper range the week before the release, chartists may see that traders were optimistic coming into results. By paying attention to option trading data, chart watchers may generate an opinion on investor expectations. Prior to the release, it looked that traders expected AAPL to rise following results.

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.

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Trading Activity

Option traders’ recent activity suggests that they believe AAPL shares are expensive and have acquired put options in the hope that the stock would close inside the box illustrated in the chart between now and Aug. 20, the next monthly expiry date for options. The price offered by put option sellers is shown by the red-framed box. It means that there is a 70% likelihood that Apple shares will finish inside this range or lower by August 20. As a result, sellers are just modestly bearish. Buyers, on the other hand, are picking up this pricing, implying that these choices are underpriced. Given that the pricing predicts just a 30% possibility of prices closing below the red box, it seems that purchasers are ready to risk such long odds.

It is worth noting that open interest on Friday included over 5.3 million call options vs over 4 million put options, illustrating the bias that option purchasers had, as traders preferred calls over puts. This usually means that option traders anticipate an increase in price fluctuation. The volatility has lessened substantially after results, but the number of put options in open interest remains high, while the number of call options is growing. Call option implied volatility has been declining, suggesting that, although the volume of call options traded has grown, they are being sold rather than purchased.

The put open interest substantially outnumbers the call open interest for strikes at the money and one step either way. Out-of-the-money put option volume drops at a considerably slower pace than out-of-the-money call option volume, indicating that more traders expect AAPL share prices will fall than increase.

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 move lower. This indicates that option purchasers anticipate the share price is more likely to fall in the weeks following the report. Despite the fact that investors and option traders anticipated favorable movement from the report, the share price rose farther than it did following the last earnings announcement.

These support and resistance levels demonstrate a wide variety of price support and resistance. As a consequence, a significant shift in either way is probable in the near future. AAPL shares declined less than 1% the day after the prior results report and continued to plummet the following week. Investors may anticipate a similar price movement in the week after this release. Because there is a lot of space in the volatility range, share prices might increase or fall more than anticipated in the short term; nevertheless, there is more capacity in the volatility range to support a move to the downside.

Wrapping Up

Apple blew beyond analysts’ earnings per share and sales projections. However, the share price slumped as Apple officials cautioned that global chip supply bottlenecks might disrupt product availability in the next quarter. In the days after the news, investors reviewed their investments and sold shares of the corporation.

Option traders seem to be selling calls and purchasing puts in order to signal a pessimistic stance. The share price action leaves more space in the volatility range for a future negative fall in the share price.

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