After Apple Inc. (AAPL) reported that it had demonstrably beaten analysts' expectations for its fiscal third quarter earnings results, option traders are taking actions that imply they think the share price will drift lower in the future. This may come as no surprise considering the AAPL share price fell 1.2% the day after the report was announced.
Apple reported earnings per share (EPS) of $1.30 and revenue of $81.41 billion, exceeding analysts' predictions calling for EPS of $1.01 and revenue of $73.30 billion. Despite the big beat, Apple shares fell after executives warned that chip supply constraints could affect iPhones and iPads this quarter. Prior to the announcement, investors had bid up the share price, with a sizable number of call options in the open interest.
Option trading volumes indicated that traders had been buying calls and selling puts; however, option activity after earnings suggests that traders are pessimistic about AAPL's share price after the tech giant beat analysts' predictions. That's because the price action has recently drifted lower, while option activity implies that traders are selling calls and buying puts.
Comparing the price action between option trading activity and stock prices on the days following earnings shows some evidence to suggest that option traders may be pessimistic. This should not be surprising considering AAPL's share price fell 1.2% the day after earnings, closing below its 20-day moving average. Additionally, put option activity increased, while call option activity decreased. This could happen because option traders believe that AAPL is overvalued at current levels and will trend lower in the near term.
- Traders and investors sold shares in AAPL after the earnings announcement, as the stock fell 1.2% the day after earnings.
- The share price of AAPL closed below its 20-day moving average.
- Put and call option activity appears to be positioned for the price to fall.
- The volatility-based support and resistance levels allow for a stronger move downward than upward.
- This setup creates an opportunity for traders to profit from a reversal in the earnings-based share price movement.
Option trading represents the activities of investors looking to protect their positions or speculators who wish to profit from correctly predicting unexpected movement in an underlying stock or index. The actions of these investors and speculators imply a forecast for the weeks ahead, because option trading is a literal bet on market probabilities—a bet made by traders that are, on average, better informed than most investors. The key to taking advantage of this insight is to understand the context in which the price behavior took place. The chart below depicts the price action for AAPL shares on Friday, July 30, illustrating the setup after the earnings report.
Over the course of the past month, the trend of the stock saw AAPL shares moving in an extreme range, closing well above the 20-day moving average, before falling 1.2% the day after the announcement. The price closed in the middle region depicted by the technical studies on this chart.
The studies are formed by 20-day Keltner Channel indicators. These depict price levels that represent a multiple of the Average True Range (ATR) for the stock. This array helps to highlight the way the price has fallen from the extreme range to the middle range. This price move from AAPL shares implies that investors are not confident in Apple's share price going forward.
The Average True Range (ATR) has become a standard tool for depicting historical volatility over time. The typical average length of time used in its calculation is 10 to 20 time periods, which includes two to four weeks of trading on a daily chart.
Chart watchers can recognize that traders were expressing optimism going into earnings, based on the price trend for AAPL remaining near the top range the week before the announcement. Chart watchers can also form an opinion of investor expectations by paying attention to option trading details. Prior to the announcement, traders appeared to be expecting that AAPL would move upwards after earnings.
The Keltner Channel indicator displays a set of semi-parallel lines based on a 20-day simple moving average and an upper and lower line. Because the upper lines are drawn by adding a multiple of ATR to the average and the lower lines are drawn by subtracting a multiple of ATR from the average price, then this channel indicator makes for an excellent visualization tool when charting historical volatility.
The recent activity of option traders implies that they consider AAPL shares overvalued and have purchased put options as a bet that the stock will close within the box depicted in the chart between today and Aug. 20, the next monthly expiration date for options. The red-framed box represents the pricing that the put option sellers are offering. It implies a 70% chance that Apple shares will close inside this range or lower by Aug. 20. So sellers are only mildly bearish. However, buyers are snapping up this pricing, suggesting that buyers consider these options underpriced. Since the pricing implies only a 30% chance that prices could close below this red box, it appears that buyers are willing to take those long odds.
It is important to note that open interest on Friday featured over 5.3 million call options compared to over 4 million put options, demonstrating the bias that option buyers had, as traders favored calls over puts. This normally implies that option traders expect upwards price movement. After earnings, the volatility has decreased dramatically, but the number of put options in the open interest remains elevated, and the number of call options is increasing. Implied volatility for call options has been dropping, indicating that, although the number of call options traded has increased, they are being sold, rather than bought.
For the strikes at the money and one step either direction, the put open interest far outweighs the call open interest. Out-of-the-money put option volume declines at a much slower rate than out-of-the-money call volume, signifying that more traders believe that AAPL share prices will fall than those who believe share prices will rise.
The purple lines on the chart are generated by a 10-day Keltner Channel study set at four times the ATR. This measure tends to create highly correlated regions of strong support and resistance in the price action. These regions show up when the channel lines make a noticeable turn within the previous three months.
The levels that the turns mark are annotated in the chart below. What is notable in this chart is that the call and put pricing are in such a close range with plenty of space to run lower. This suggests that option buyers believe there is a greater probability for the share price to move lower in the weeks following the report. Although investors and option traders expected positive movement from the report, the share price moved a larger distance than it did after the last earnings report.
These support and resistance levels show a large range of support and resistance for prices. As a result, it is possible that there could be a large move in either direction in the near future. After the previous earnings announcement, AAPL shares fell less than 1% in the day following and continued to fall the following week. Investors may be expecting the same kind of move in price in the week after this announcement. With lots of room in the volatility range, share prices could rise or fall more than expected in the near term; however, there is more room in the volatility range to support a move to the downside.
Apple annihilated analysts' EPS and revenue expectations. However, after Apple executives warned that global chip supply constraints could affect product supply in the next quarter, the share price fell. Investors reassessed their investments and sold shares of the company in the days following the announcement.
Option traders appear to be selling calls and buying puts, expressing a bearish outlook. The share price activity provides more room in the volatility range for a downward move in the share price going forward.