The more interesting thing to look at has been the reaction to the AAPL iPhone 4S. Actually, the reaction should come as no surprise to most traders. If one looks at the iPhone 4, the iPad, and the several AAPL earnings announcements, there is a bit of run up ahead of the announcement and then a sell off afterwards. While one might argue there was no run up in this case, I would argue that AAPL's 'run' was its relative outperformance of the S&P 500 as the whole market tanked.
With Today's AM sell off of AAPL, I think the stock established a floor and has a chance to test the $420 high before it hits its earnings. IV is sky high and I would never normally buy premium in AAPL at these levels. However, the fact that earnings is approaching, and I am expecting a 10% price appreciation between now and earnings makes call buying a sensible approach. Ahead of earnings I think the AAPL 390/410 call spread has excellent risk reward as AAPL rallies into its earnings announcement. The spread has a risk reward of about 3 to 1.
The key to the trade is to NOT hold it into earnings. We will be exiting by next Friday, whether AAPL rallies or not.
Trades: With AAPL trading at $375, buy to open AAPL October 390 calls for $8.75 and sell to open AAPL October 410 calls at $3.40.
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