How to Trade Apple… Even if Earnings Stink

Keith Fitz-Gerald Aug 01, 2017

I’ve long advocated that investors who don’t trade both sides of the market are giving up half their profit potential – possibly more – because they’re thinking only in one direction.

Problem is that the stocks can and do go both directions.

Take Apple Inc. (NasdaqGS:AAPL), for instance.

The stock reports after the bell today and I think earnings will probably be good. Generally speaking, I think sales figures will be in line with expectations and that service revenues will probably be an area of significant growth, something I noted Monday during an appearance on Fox Business Network’s Varney & Co.

It’s the guidance that concerns me.

Rumors are flying that the company may be facing delays with regard to the release of the iPhone 8. There are also concerns that the company is losing global market share stemming from a loss of innovation.

I can’t say I disagree.

Those are valid concerns; to my way of thinking, Apple now oozes MBAs instead of the dynamic thinking and product development that it used to.

What I want to see is more emphasis on the “ecosphere” we’ve talked about so many times in the past. And, if that doesn’t materialize?

That’s why I’m writing to you today on a Tuesday ahead of the company’s earnings instead of our usual Wednesday delivery slot. I want you to have the chance to profit from anything that spooks the markets if Apple upsets the apple-cart, so to speak.

To be clear, I don’t think Apple is going to fail so what I am talking about here is a short-term trading opportunity that balances out the longer-term investment perspective the company merits.

By its very definition, that means you treat the trade I am suggesting today as a speculative trade with a 24-48 hour window. That also means you do NOT use money you can’t afford to lose and that you confine total dollars committed to the trade to 2% of available capital or less in keeping with proper risk management.

So, what do you do?

There are a lot of ways you can profit when the markets, or even specific stocks like Apple, change direction. In fact, the menu of choices makes ordering designer coffee seem positively simple. There are shorts, leveraged inverse funds, spreads, derivatives, and futures contracts with all kinds of exotic names (though most are simply ways to separate you from your money).

If you want simple protection you can almost “set and forget” as an investor, consider buying a fund like the Rydex Inverse S&P 500 Strategy Inv (RYURX). It’s an inverse fund that tracks the S&P 500 and rises 1% for every 1% the index falls.

Studies suggest that having 2%-5% in a choice like it can not only dampen overall portfolio volatility, but hedge the income stream and principal value of your investments at the same time.

I’m suggesting this as a means of giving anybody who doesn’t “do” options a means of playing along. And believe me you’ll want to if Apple does anything less than knock it out of the park.

The company carries a $776 billion capitalization and is one of the most widely traded securities in the world so it has the potential to move the markets.

But if your goal is quick profits, you’re options savvy, and you’re more aggressive, I believe you can get the biggest bang for your buck – and take on the least risk – buying cheap, out-of-the-money put options.

Buying puts is one of the most conservative options strategies there are.

The Best Way to Profit from Short-Term Dips

It’s basically a bet that prices will go down by a certain amount within a certain time frame. They’re a great tool because put buyers profit as the underlying stock or index falls. That’s what makes them a great tool for reversal trading, especially now with the markets in nosebleed territory and a stock like Apple is rumored to deliver something “surprising.”

Keep in mind, reversals are very, very rarely anything more than a short-term adjustment, and that’s precisely how you should consider trading this one. If your core portfolio is lined up with an appropriate mix of unstoppable global trends, then allocating a portion of your money to profiting from them is logical in the pursuit of higher profits.

Contrary to what people believe, trading reversals successfully is NOT about timing. It’s more about picking logical points at which the markets will be stressed. Like Apple could be.

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If you want to play along, here’s what I suggest.

Action to Take: Buy to open the AAPL August 18, 2017 $148 Put (AAPL170818P00148000) at market.

If Apple does provide anything other than stellar guidance, the price could drop dramatically which, of course, could mean big profits for everyone following along.

You can see that very clearly in the following chart.

A fall to $142.57 would result in approximate profits of $3.58 (or $358.86), a fall to $138.18 would result in $7.02 (or $702.44) and so on. That’s enough to turn every $350 placed in this trade into $708 or even $1,052, not including commissions and fees.

Not bad for a day’s work, eh?

However, the reverse is also true.

If Apple manages to squeak out good guidance, this is not a trade you’ll want on the books for long because the option will lose money very quickly if Apple’s stock heads higher. In fact, the delta on the AAPL170818P00148000 option is currently $0.47, which means the option will move $0.47 (or $47) for every $1.00 that AAPL moves.

I believe the trade has a life of 24-48 hours at most when you factor in how fast traders are going to hit the sell button and how fast bargain hunters will fill the void after it falls. So, plan on being out of the trade – meaning closing it down – quickly.

Here’s an Example…

Let me give you a recent example of how this kind of trade works. After all, this isn’t our first rodeo.

Around this time last year, Tesla Inc. (NasdaqGS:TSLA) was showing bleak financials ahead of its earnings report – a Piotroski score of just 2 of 9 points, a profit margin bottoming out near -22%, and negative cash flow of $642 million.

Now, if you’ve ever seen me on TV or read anything I’ve written on Tesla, you know that I believe very strongly that Elon Musk could be the most innovative CEO on the planet, so this recommendation may seem at odds with what you’ve heard. I’m bullish on Tesla in the long run, but still, I saw a temporary slump in company’s short-term future.

So, on June 7, 2016, I told subscribers of my High Velocity Profits premium trading service to buy TSLA September 16, 2016 $220 Put (TSLA160916P00220000) at market.

Five days later, we closed out half of that position for a 100% gain and let the rest run.

Apple could be a repeat of that situation.

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Three Key Takeaways on This Tactic

Not every trade is a winner, obviously, but if you place your trades correctly, the downside risk pales in comparison to the potential returns individual investors can achieve in a situation like the one Apple finds itself in today when a widely held stock gets stressed.

First, if you’re not familiar with options or flat-out refuse to learn, you can always buy the RYURX as a fallback. But I really urge you to consider them. Old dogs can learn new tricks. Options can be a powerful adjunct to your core investments. They can juice your profits, get you into a stock you like at a discount, or even reduce your risk. They don’t have to be complicated, either. In reality, if you’ve ever made a down payment on a house, used an escrow account or even put something on layaway, you’ve already used a form of option.

Now for the caveats – you knew these were coming and, truth be told, I would be incredibly remiss not to mention them.

Second, you will need to get approval from your broker to trade options of any kind. I know that sounds funny given that it’s your money at risk, but your brokerage firm has to know what its exposure is nightly when it marks every position it’s responsible for to market – including yours. Approval isn’t difficult to get, but it may take a few days. You’ll submit a series of forms after answering questions related to your risk tolerance, goals and assets. You’ll also be required to receive and be responsible for reading the Characteristics and Risks of Standardized Options which either your broker will provide or you can get on your own through the Options Clearing Corporation.

Finally, about risk – perhaps the most important part of any trade. When I talk about options, I am talking about them being used as a complement to the rest of your investments. In that sense, they’re no different than buying shares of your favorite speculative tech company – you can invest a few hundred bucks with the possibility of huge returns.

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You just have to keep the risks in line with your own financial appetite. I have no way of knowing what that is so this is a discussion that’s between you and a financial professional. Betting the farm is a dumb move. But that’s getting ahead of myself as “trade sizing” is an entire discussion unto itself which I’ll save it for another time.

My suggestion is that you strictly limit your options activity until you get comfortable with how they work. If needed, open a separate account just for options. Paper trade first – meaning chalk up your wins and losses on an old fashioned yellow pad until you get the hang of it. That way you’re not tempted to take on more risk than you can handle.

By the way, that there can be a lot more to options and I’ve only scratched the surface today.

That’s why I want to share this FREE options primer from my close friend and colleague, Tom Gentile. He’s put together this package of materials specifically to make options trading as simple as possible – I recommend you check it out.

Best regards for great trading,

Keith

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