Apple Options Signal Bullish Sentiment Ahead of Earnings Report

Apple is set to report its fiscal second-quarter earnings on Thursday after the market closes, and a notable shift is occurring in its options market. A key measure of downside risk has significantly decreased over the past five weeks, indicating a growing bullish sentiment among traders as they approach the earnings announcement. Traders are anticipating substantial market movement.

Historically, Apple's average one-day move following earnings has been 2.2% over the last 12 quarters. However, current options pricing suggests a potential move of nearly 3.6% this cycle. This expectation of a larger-than-usual move is understandable given concerns about the impact of higher oil prices on consumer spending, the transition from Tim Cook to John Ternus, tariff uncertainties related to components sourced from China, and questions surrounding iPhone demand in the latter half of the year.

Despite the potential for a significant move, the options market is sending a positive signal regarding direction. The RiskDex, which measures the relative cost of AAPL put options compared to call options, has fallen sharply in recent weeks. On March 25, it stood at 2.92, the highest in three years, but by midday Wednesday, it had declined to 1.36 – a drop of over 50%. This indicates that traders are aggressively buying call options to capitalize on potential upside while largely ignoring put options for downside protection.

The message from the options market is clear: traders expect positive results from Apple. For those who believe the market is overly optimistic, a collar strategy (selling a covered call and buying a protective put) could be employed to take advantage of expensive call options and relatively cheaper put options. Alternatively, if the market is correct and Apple delivers a solid quarter, a 275/285 call spread could be considered, offering a nearly four-to-one payoff with defined risk.

Apple, with its nearly $4 trillion market capitalization and ubiquitous products, remains a market favorite. However, it's crucial to heed the signals from the more discerning options market, which currently supports a positive outlook.