What The Options Market Tells us about earnings.
AAPL was scheduled to release earnings after the bell on July 24th 2012.
This is the available information going into the event.
The actionable information comes from the options market projected expected move, something that has already been mentioned in a previous blog. The real valuable information is found here. (See Below)
The Volatility of the underlying is bid up in expectation of this catalyst. The front month Vol in this case is pushing 67% while the back month is in the low 30s. This is telling us after this event regardless of the direction we will expect this to impact all prices negatively - negating direction as a factor.
We know that the Options model is pricing in a move of either up or down $32.00, the last trade price was exactly $600.92
ThinkorSwim has licensed this exact Expected Move formula from Cantor Fitzgerald. But it basical averages the near the money options in the front expiration to give a 1 day possible up/down range. (It doesn't look at the implied vol directly)- TP.
Lets unlock this trade.
Here is what we did and why we held on to it through this earnings event.
This is how the trade prices out
+ 570 Strike 10x @ -$12.85 Debit (-$12,850.00)
-560 Strike 10x @ +10.10 Credit (+$10,100.00) = -$2750.00 Debit
-540 Strike 20x @ $6.10 Credit (+$12,200.00)
+530 Strike 20x @ 4.70 Debit (-$9400.00) = +$2800.00 Credit
TOTAL $.05 Cents Credit x10 or $50.00 or paid to play.
The Risk Graph looks like this:
What do we want? Anything to the upside we pocket the $50.00
What we don't want, anything below 535, or 66 points lower, or twice the expected move.
What is the home run area, 570-535
and now we pray.
Wait for it................
This is one of the millions of times we have seen, that just re enforces the power of the options market to forecast the power of any upcoming move.
Note the Last Trade price of $600.92- Seconds after earnings the market is 570 bid x 570.10
We we Ended up exiting this trade minutes after the open the following day.
We got one off early at $1.75 credit, and closed the other 9 at $1.50 credit minutes later.
Paid to enter, and paid to exit.
Thank You
