Max Grigoryev
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Max Grigoryev in Fundamentality,

AAPL: low risk options strategy

Apple announced its earnings a few hours ago. Unsurprisingly, the company missed the analysts estimates and dropped more than 8% after-hours. So the company joined the club of the stocks that are easily driven by analysts estimates. We've already seen the same situation with LinkedIn a few month ago (in order to remind - LinkedIn missed the guidance, not even the past earnings), Twitter (reported a few hours ago as well, increased their MAU, profits, but missed the estimates) and some other tech stocks. 

I don't like such situations, because I know that some people spend some time on due dil, decided to go into stock (long or short, it doesn't matter), but analysts have the opposite opinion on that. That's why we see the stocks going down after the earnings calls. 

Here is the strategy, how to deal with such situation, if you own the stock, but lost 8%-10%-12% due to this analyst trap. Use options. According to the situation with NFLX - the stock dropped around 12% after earnings a week ago from $108 to $96. Current price is a $92.43 which is just 3% lower than the price after the drop. 

After such a significant moves, the stocks lose their volatility and stay in range of +-5% for some time. Here we are going to use this assumptions and try to maximize our profits from Apple's options. 

I suggest we'd better sell the straddle: 

As far as we don't have an updated prices for options, I took the spread for current ATM options and assumed that the volatility will go slightly higher and will increase the options prices.  The estimated returns we can see right here: 

As we can see from the table, the highest profit we'll get if the stock stays in a range from $86 to $106 by the end of the next week. It doesn't sound impossible, because as I've already told, the volatility of the stock drops after a significant move. $86 is 10% lower than current price ($96 after hours) and $106 is 10% higher, so we have quite a good margin. 

So you can get around $75 per 1 call and 1 put, it means that if you sell 10 puts and 10 calls, you can get up to $750 almost guaranteed. That's not a huge amount, but still it's almost in your pocket, you just need to come and get it. If you think that it's too risky and the stock could go higher or lower than 10% from current price, you'd better buy the stock and hence hedge the strategy. 

Let me know what you think in the comments.