Option Pit's Research on AAPL as Seen on Mad Money

Posted January 25th, 2012 by Mark Sebastian in Education

Option Pit's Research on AAPL as Seen on Mad Money

Here is the research that was used on Mad Money along with a slightly more indepth description. To see Mark's analysis that Jim Cramer used on the program, you can click here for the video.

It is impossible to deny that AAPL has one of the most, if not the most, talked about earnings release of any technology company. AAPLís combination of a rabid fan base, huge market capitalization, and wide stock ownership forces traders to pay attention. The earnings have become such a big deal that sites such as TheStreet now open chat rooms to discuss AAPL earnings. On Octoberís release, TheStreet had around 15,000 AAPL enthusiasts in its earnings chat room.

Leading into this cycle, AAPL has rallied more than 15%. I thought it might be interesting to study chart patterns on performance after AAPL releases earnings. In particular, when the stock has had a big run up prior to the release. First letís look at 2010:

graph from thinkorswim

Number 1 and Number 2 both point toward times where AAPL had a HUGE run up leading into earnings. After the earnings report, if the stock did not immediately sell off the next day, within a few days the stock had dipped lower than where it was trading before earnings were released. If we were looking at only 2010, our research would suggest to sell AAPL the day before it releases its earnings report, let the stock sell off on earnings, wait two weeks, and then buy it back.

Moving on to 2011 we see 2 more instances of major run ups occurring prior to an earnings.

graph from thinkorswim

Again, in both cases, if the owner of AAPL stock sells his or her stock position before earnings and then waits two weeks to buy it back, the trader is a winner. It is important to note that in July, AAPL actually did rally quite hard the day after earnings; however, that rally was short lived. The trader would have only been kicking him or herself for about 2 days.

Looking ahead to AAPLís results in 2012 we see another nice looking rally:

graph from thinkorswim

Based on the last few times AAPL has had a large rally ahead of earnings, I think it makes sense to take a thoughtful approach to AAPL earnings. Even if the trader thinks AAPL is going to rally off of a new IPAD announcement (btw AAPL usually sell off after they announce products too), the risk reward is not there. At this point, the longs are already almost 20% off the lows.

What about those who are CONVINCED that AAPL is going higher? It still does not make sense to own the stock outright. I pulled up the current cost of insurance in AAPL options. It is at the lowest levels in 6 months and well below where AAPL options can trade ahead of an earnings announcement

graph from LiveVol (R)

For traders that think this stock is going to the moon, sell the stock and buy calls. This will limit loss exposure, while still giving the trader upside. On the flipside, traders that do not wish to take a large capital gain on AAPL should consider buying puts at these option levels.

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Mark Sebastian is the Director of Eduction for Option Pit, and a former market maker on both the Chicago Board Options Exchange and the American Stock Exchange. He has been published in nationally on Yahoo Finance, quoted in the Wall Street Journal is a featured contributor for TheStreet.com. He also writes regularly for SFO, and OptionsZone, and is the managing editor for Expiring Monthly: The Option Traders Journal.

To learn more about Option Pit and its mentoring services, please visit OptionPit.com

About Mark Sebastian

Mark Sebastian is a former market maker on both the Chicago Board Options Exchange and the American Stock Exchange. Along with his role directing the path of education for Option Pit, Mark is currently the director of risk for a private hedge fund. He writes a daily blog, the Option Pit blog, formerly Option911. Sebastian has been published nationally on Yahoo Finance, Google finance, Financial Times Alphaville and is a featured contributor for TheStreet.com. He is also published regularly at SFO, the Options Insider, and is one of the Co-Hosts of The Option Block Podcast, a featured Podcast from Options Insider Radio. Mark is the managing editor for Expiring Monthly: The Option Traders Journal. Sebastian has a Bachelor's in Science from Villanova University. To learn more about Option Pit and their mentoring services, please visit: http://www.optionpit.com

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