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Pregame AAPL Earnings From Every Angle 10.25.12

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The first graphic is a daily bar chart of price’s reaction to the past nine earnings announcements from AAPL. Action after the event is mixed; in most of the sample set, eight of the nine observations, AAPL gapped, but then filled or reversed into said gap. In the other observations, AAPL gapped, but then trended or pinned that Friday. This is indicative of efficient markets and random walk…for each observation is unique and independent of past price action. The gap is the price’s way of adjusting to new news. While this gap may seem inefficient, the derivatives market, in most cases, was expecting said move.

Screen shot 2012-10-25 at 7.11.46 AM

Now to what is implied for the coming event, because the AAPL weekly options only have two days until expiration, they will be an organic way to derive what is implied for the event today after the close.  Using the KOTM implied volatility & time based model, we calculated the one-sigma move (68% probability within) to be roughly $38 up/down or about 68% chance we settle between $654 and $577 by the close on Friday. The two sigma move (95% probability within) is $77 either way or $692  & $539. The implied volatility curve (IV being a measure of risk, supply and demand, relative price, and an input into theoretical models) is displayed below, for it is important to know, especially if one is trading two different months in a spread.

The following chart includes the one and two sigma rolling probability cone, volume profile, and major moving averages (50, 100, 150, & 200).  While the chart may seem noisy, it sure does tell us a lot if you listen! AAPL made its ATH of $700 and has been sifting lower since. Anchoring the breakout on 1/15/2012, AAPL is just about at the 38.2 Fibonacci retracement level. The 150-day moving average at about $614 has proved to be solid support over the last three days. Other than little support levels like prior lows, the next serious support level is the 200-day moving average at $586. Considering the massive OI in the weekly options there is a change it could pin, even though we are not using the monthly cycle options. On expiration Friday, the 50-day will sit at the higher end of the two-sigma rolling probability level, and the 200-day at the lower end.  The 200-day is -4.8% away and the 50-day is 7.5% away.

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The ATM (at the money) front month $615 straddle (lifting the offer) is at about $32.10 (5.1% of stock). Because deltas move to one faster near expiration, it is easy to calculate break evens on the straddle; $582.9.75 & $647.06… IV crush, large gamma, and time decay.

IV is actually expensive however, historically speaking, given the average is 68% and Wednesday closed at 86%. The average % move and net change are about 5.5% & $26 respectively…see excel sheet for all data. Considering AAPL’s price, the ATM straddle will cost about $3,200. This is where the AVSPY will come in handy, while this is not a pure AAPL play, it does lower the relative cost.  The $220 ATM AVSPY straddle is about $15, about 6.8% of that product, and only $1500 per one lot.

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Alpha options explained here LINK

http://www.keeneonthemarket.com/blog/1562-goog-aapl-spy-alpha-option-review-avspy-a-goosy-10172012

Feel free to e-mail any comments, feedback, suggestions, or general inquiries to…

Author

mark@keeneonthemarket.com

Data courtesy of Thinkorswim

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Financial Horror Movie: NFLX Post Earnings 10.24.12

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The massive implied volatility has more or less been realized since shares started to tumble after their all time high of $300 in July 2011, but what has caused this surge in volatility and does NFLX’s outlook justify said price gap.

In short, it really does all come down to NFLX’s consolidated global performance. Here the company guided to a net loss of $13 million to a slight profit of $2 million.  The proverbial bell that rang at the top, considering hindsight is 20-20, was when the company decided to raise its monthly fees to subscribers in mid 2011. Since then, paid subscribers (international/domestic streaming and DVD) have fallen off along with every other metric.

As with any business, watching cash is key to gain insight if one is successful or not. In the case of NFLX, the latter has been favored for the company has been losing cash. In Q3 total cash was down $32 million. The net income line for Q3 may be deceiving for FCF (free cash flow) was down $20 million. FCF being the amount of cash generated by the business after taking into account cash required to properly grow said business. According to NFLX, “significant uses of cash in the quarter (relative to net income) were cash payments for content (in excess of the P&L expense), cash payments for PP&E (including cache boxes for our Open Connect program), and reductions in miscellaneous accounts payable and accrued expenses.”

While NFLX may be a questionable investment, it is definitely a great trading vehicle. Weekly IV was at 180% before the event, and it got down to 90% today… a massive crush. The weekly options also have nice bid ask spreads, even out to the OTM strikes. Short interest is at about 29% and the analyst community has 7 buys, 22 holds, and 8 sells on NFLX. The average price target for NFLX is about $72 and next year the analysts are expecting $0.82 in EPS.

 Screen shot 2012-10-24 at 8.53.25 AM

Feel free to e-mail any comments, feedback, suggestions, or general inquiries to…

Author

mark@keeneonthemarket.com

Data courtesy of Thinkorswim