Buying puts or calls just before the numbers come out is a fool's game
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.
After a five months of jagged ups and downs, AAPL overtakes a record set on Feb. 16, 2011
Investors who stuck with Apple (AAPL) through thick and thin this year got their earthly reward Friday.
With only two trading days left before what's expected to be yet another boffo earnings report, the stock broke out of its Max Pain trading range and set a new all-time record.
After hitting an intraday high of MOREPhilip Elmer-DeWitt - Jul 15, 2011 4:07 PM ET
Opens $3.79 (1.2%) higher after the firm resumes coverage with a $430 price target
Goldman Sachs (GS), one of the few major U.S. investing firms that wasn't covering Apple (AAPL), resumed coverage Sunday with a price target of $430.
The stock reacted immediately when trading began Monday, quickly setting an all-time intraday high of $325.06 as 1.4 million shares changed hands at the opening bell. It gave up some of its gains MOREPhilip Elmer-DeWitt - Dec 13, 2010 10:08 AM ET
|AT&T cuts prices again|
|Can Fox's reboot of 'Cosmos' find an audience?|
|Winners and losers of the bull market|
|The medical marijuana ad that never aired, despite contrary media headlines|
|How to tell your kid you can't afford her dream college|