Waiting For This Cult Stock Giant To Fall

Hey Traders,

Some things are just too good to be true …

A supplement that lets you eat whatever you want and still lose weight … an investment opportunity that ‘can’t lose’ … an email from a wealthy foreigner who just needs someone to ‘help’ him with his vast fortune …

Five free trades from three pro traders … oh, wait, we did that last week.

With the insane run-up this cult favorite has been seeing lately …

I think it’s string of all-time highs might also be too good to be true … I just don’t see it sticking.

Okay – long term, it’s anyone’s call.

But in the next few weeks, I think this tech giant is going to struggle.

And when it does … I’ll be there to cash in on the fallout.

Cult-favorite tech giant Apple Inc (Ticker: AAPL) has had a monster summer, up 18% since June 1, and racking up all-time high after all-time high. The shares even tested the $150 level last Thursday, but weren’t quite able to break over the critical round number mark.

Recent hype has focused on AAPL’s ambitious sales forecast for its new iPhone release in September, and the stock was also boosted by positive attention from several analysts.

The smartphone maker now has a market cap of nearly $2.5 trillion, and is expected to deliver solid results at its earnings call later this month on July 27.

So … why am I not bullish on AAPL?

Simply put, I think AAPL has run too far, too fast.

And with earnings around the corner, I think the shares are going to be giving back some of their recent upside … soon.

Like I said, there’s high expectations for AAPL’s earnings call, and even meeting or exceeding those expectations might not be enough to give the shares more upside. That’s precisely what we’ve seen over the last several quarters, with AAPL delivering better-than-expected results, and proceeding to drop during the following trading days.

The blue boxes indicate AAPL earnings dates.

Note how AAPL shares were performing just ahead of their previous two earnings calls … seem familiar? 

This wouldn’t be the first time the tech stock has seen tremendous pre-earnings upside, followed by a post-earnings tumble. In fact, last time AAPL had a positive post-earnings session was last July!

Let’s take a look at the current at-the-money (ATM) straddle price for AAPL options. If you read Saturday’s Pit Report, you know that looking at ATM straddle prices for the expiration term immediately after an earnings call can give us insight into how big of a move traders are expecting to see post-report.

For AAPL, the 147-strike straddle is currently priced at $7.65. This tells me that AAPL’s expected post-earnings range is between $139.35 and $154.65.

That’s about a 5.2% move being priced in right now, and quite a bit higher than AAPL’s median post-earnings move of 2.2%, based on data from the last eight quarters.

Here’s where it gets interesting …

AAPL options are actually priced on the lower end of their range right now, with the stock’s 30-day ATM implied volatility (IV) sitting in just the 21st percentile of its annual range …

Given that IV tends to be elevated headed into earnings, the fact that these options are still relatively cheap opens up some very intriguing pre-earnings trading potential.

And we can actually look at the AAPL’s own volatility index — the CBOE Apple Volatility Index (Ticker: VXAPL) — to confirm!

In spite of AAPL’s monster run higher, implied volatility has been falling long-term, and is still surprisingly soft ahead of earnings.

 

So we’ve got AAPL making an outsized run higher, and low IV making for cheap options … 

Can you see a trading setup forming?

I certainly can.

In fact, last week I purchased AAPL July 23 147-strike puts as one of my Robinhood Trader trades (you can see my trading record, including this trade, right here). 

However, these puts expire before the AAPL earnings call, since I’m anticipating at least a small drawback before AAPL takes its turn at the earnings confessional on the 27th.

Plus, I don’t like to hold trades through earnings, given the elevated risk, expensive IV, and potential post-earnings volatility crush.

Your Only Option,

Mark Sebastian

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