How NOT to bet on Apple's quarterly earnings report

Buying puts or calls just before the numbers come out is a fool's game

Click to enlarge. Source: Kim Klaiman via Seeking Alpha

Apple (AAPL) is a company that tends to surprise Wall Street every time it reports its quarterly earnings, usually on the upside, occasionally on the down.

As a result, the stock often makes big moves the next day -- sometimes as much as 5% and 6%.

Given the power of stock options to leverage your investment dollars, you might be tempted to bet on the earnings report coming out next week by buying Apple calls (if you think the stock is going up) or Apple puts (if you want to bet that it will go down).

That last bet paid off handsomely in October when Apple reported Q4 2011 earnings that disappointed Wall Street. The stock fell 5.59% the next day and the value of Apple's weekly puts rose 132%.

But that's the exception, not the rule.

As Kim Klaiman demonstrates in one of the most sensible Seeking Alpha articles I've read some time, buying either puts or calls just before Apple's earnings report is, on average, a losing proposition.

Over the past eight quarters, he shows, Apple's weekly calls lost an average of 20% of their value the day after the earnings reports, while the puts lost nearly 40%. (See Klaiman's spreadsheets, above.)

"The explanation for those numbers is simple," Klaiman writes. "Over time, the options tend to overprice the potential post-earnings move. Those options experience huge volatility drop the day after the earnings are announced. In most cases, this drop erases most of the gains, even if the stock had a substantial move."

As near as I can tell, the only people making money in options are the traders who are selling them or simultaneously buying and selling puts and calls in complex combinations. Klaiman recommends either the Iron Condor or the Reverse Iron Condor. See here.

Posted in: Apple, Calls, Equities, Investing, Kim Klaiman, Options, Puts, Seeking Alpha

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  Even for a stock as volatile as Apple, Wednesday was a weird one

  According to Terry Gregory, who keeps track of such things at AAPLInvestors.net, Apple (AAPL) was set to register its 8th highest close of all time -- $408.25 -- Wednesday before the selling started. By 4 p.m., it had fallen to $402.64 a share, its 19th highest close.

  Gregory's one-word comment on Investor Village's AAPL Sanity board: "Ugh."

  Subscribers to the theory of MORE

  Philip Elmer-DeWitt - Dec 29, 2011 8:24 AM ET
  Posted in: AAPLinvestors.net, Apple, Calls, Max pain, Options, Puts, Share price, Terry Gregory, Weeklys

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  If you're any kind of Apple (AAPL) investor, you should be aware of the chart at right, even if you don't know a put from a call and don't really care to.

  It shows the value in millions of dollars as of Wednesday morning of the outstanding Apple options that expire this Friday, with the magenta bars representing MORE

  Philip Elmer-DeWitt - May 18, 2011 7:36 AM ET
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• How the market in Apple 'weeklys' is rigged

  If you're looking for evidence of manipulation, Friday's close was picture-perfect

  "The easiest way to think of options," wrote The Market Skeptics's Eric deCarbonnel in a prescient 2009 post, "is as a type of insurance. Investors pay a premium to protect themselves against sharp swings in the market. If these sharp swings don't happen, those selling options (option market makers) keep the premiums as profit."

  "In a legitimate free market," he continues, "every MORE

  Philip Elmer-DeWitt - May 15, 2011 9:32 AM ET
  Posted in: Android, Apple, Calls, Derivatives, Eric deCarbonnel, Financial, Google, Investing, Jim Cramer, Jon Stewart, Manipulation, Market maker, Options, Puts, Share price, Steve Jobs, The Daily Show, The Street, Travis Lewis, Weekly options, Weeklys

• Is Apple's share price being manipulated?

  There's something very fishy about the weekly options market. Is it time to reel in the bad guys?

  It was 3:48 p.m. on Friday April 29 and traders who had purchased Apple (AAPL) April 29 $350 "calls" -- options that gave them the right to buy Apple shares in blocks of 100 for $350 per share -- were sitting pretty. The stock was trading around $353.50 and those calls were worth MORE

  Philip Elmer-DeWitt - May 12, 2011 1:00 PM ET
  Posted in: Apple, Calls, Financials, Manipulation, Max pain, Options, Pinning, Puts, Share price, Stock, Strike price, Trade