We covered Apple yesterday in looking at implied moves. Here’s how that suggested trade is likely to do. (November 01, 2018)
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Apple ( NASDAQ: AAPL ) reported earnings; they looked okay. Not that anybody should care what I think whether they looked okay or not; the stock is down and that is all that matters, at least it’s all the matters to me.
I mentioned yesterday in the Chart of the Day Video (that’s why I am following up on it today) that the implied move on Apple ( NASDAQ: AAPL ) was about $11.00 or so. That took it up to 230.00 and then down to 210.00, I have 208.00 here but it is basically 210.00. Anyway, the company reports earnings; the stock falls down.
The idea is that if this is the box between 210.00 and 230.00 that is what the option market implied the move was. If that was the move that it was supposed to be (forget about the upside here because that’s not relevant), let’s say the stock is down here, anywhere down here; what’s going to happen is, just because of the dynamics of the way the option market works and traders unwinding positions and taking off hedges and this and that and the other thing, if the stock opens up down here someplace it is likely to snap back this way.
Similarly, if the stock were to gap way up it would be likely to snap back here. Really the place where you would expect this stock to stay, at least into tomorrow, is in this green box here. So this COULD set up a nice trade tomorrow. The stock isn’t down that much, it’s down less than 5 percent, which doesn’t really stretch the rubber band that tight, frankly, and that is what you want. You want a stock that’s REALLY, REALLY displaced so you can take the other side of that panic trade.
But here it looks like the stock is already down a bit but that is really not that relevant because after this earnings, Apple ( NASDAQ: AAPL ) is a high profile company, and so you are going to have a lot of ratings changes. You are going to have upgrades, downgrades, price target changes and stuff. And that’s the stuff that is going to impact the stock tomorrow. As we look at this at 213.20 I can pretty much guarantee it won’t be trading at 213.20 tomorrow morning. The only question is, will it be trading at 218.00 or down at 208.00?
So what’s the trade? Here’s the trade: If you are buying this stock you want to keep your stop below, we’ll say, 208.00. Frankly, you could even put it at below 210.00; not at 210.00 but below 210.00. I tend to want to, in this case, trade a little bit smaller, give the stock a little bit more room to wiggle because there is going to be everybody and his brother and cousin Vinny trading this stock tomorrow. It is going to have massive volume first thing in the morning so the stock can gyrate around a bit. But if you just look at this general level I think you are going to be just fine.
At Option Market Mentor we put on an iron condor in the afternoon just slightly before, about an hour before the close or so, and we sold the November 230.00 calls and bought the 235.00 calls. Then we sold the November 210.00 puts and bought the 205.00 puts for insurance. So for us, if the stock does in fact stay in this range, we are going to be happy campers.
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