Options traders are betting on Apple (AAPL Stock) to fall

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  • Apple is expected to announce record earnings.

  • Options markets are betting that all the good news is built in.

  • Investors want buybacks and dividend raises.

  • Apple has a history of sandbagging markets.

Apple is expected to announce record earnings

AAPL will report earnings after the close today and markets are expecting a blow quarter as the Cupertino giant is likely to have re-established its leadership in the global smartphone handset market.

Options markets are betting that all the good news is built-in

There is however one area of the market that is actively betting that the stock will fall. According to Mott Capital Management, “Since the beginning of April, traders have been building up big positions for both the $135 puts and calls. Over that time, both options have seen their open interest levels rise by roughly 65,000 contracts each. The data shows most of the calls have been sold, and most of the puts have been bought. The calls have been sold for approximately $3.50 and $4.15. Meanwhile, the puts have been bought for around $10 and $11. This would suggest that the trader paid roughly $7 per contract and would need the stock to fall to approximately $128 or lower to start earning a profit on the trade, a drop of at least 4%.”

The consensus view is that AAPL will have a record-breaking quarter with smartphone shipments rising a whopping 50% year on year while the true surprise could be in the massive gains in the MAC line which could literally double in shipments due to new models and pandemic demand. But much of the good news is already priced into the stock which is trading at high historical valuations. The key therefore will be forward guidance from the management.

Investors want buybacks and dividend raises

In order for the bullish case to take hold and move the stock towards all-time highs above the $140 level investors need to hear two things from the company – strong forward guidance and further stock buyback or dividend increases. Performance alone is unlikely to push the stock to fresh highs.

Apple has a history of sandbagging markets

AAPL stopped providing forward guidance during the pandemic so a return to guidance would not only be a signal of normalcy but also a sign of the company’s confidence in its future business. However, the truly bullish move would be if AAPL announced new stock buybacks or an increase in dividends. The company currently has more than $200 Billion of cash on hand and about an $80 Billion net cash position. It announced a massive multi-year $460 Billion investment plan in the US so it will be interesting to see if it is willing to part with some of its cash pile in order to appease investors. 

Clearly, the options market is betting no and is making the assumption that all of the good news is baked in. However, AAPL is notorious for sandbagging the markets and beating expectations by a wide margin. The stock has a long history of rallying for weeks after positive earnings releases, so unless there is some unexpected bad news (the biggest wildcard is demand in China which may have slowed markedly in March and April) AAPL is likely to maintain its winning ways.