Wednesday, April 25, 2012

AAPL Q2 Earnings: Why I Played It

Yesterday, Apple's CEO Tim Cook released some spectacular earnings which blew estimates to shreds. After a dramatic sell off in which AAPL lost 10% in just a mere ten days, this stock deserved this bounce. An amazing $12.30 EPS versus the projected $10.04. But after all, the company we're talking about is Apple, and such results are hardly surprising.

Why did I go long into earnings?

Minutes before the markets closed yesterday afternoon, I carefully considered my risk/reward and purchased OTM call options. Why did I not choose to do spreads? Because the implied volatility pointed to a 7-8% change in the stock price; with spreads, the limited reward was not as enticing as a simple premium risk with limitless upside. A whooping 267% gain before I sold at the open this morning. But that's irrelevant, so here's a chart:

The stock only just broke through the 50 day MA, but feebly is the adjective I'd choose. The candles below the 50 day are almost doji-shaped, which can only mean reversal, which also works in accordance with the lower support line. But furthermore, the RSI is showing some serious areas that were oversold within the past week in comparison to the past 3 months. A bounce from 560 would mean a big bounce.

Many people reasoned that the recent and sharp declines were because of the weak earnings from mobile service providers. Of course, weak mobile service earnings equals weak Apple iPhone sales, right? Yes, and no. Companies such as AT&T did report weakly in the phone section. However, many people forgot about something: China ... and other countries. 

Relatives and friends of mine in China called and told me of the outrageous (literally) rush for Apple products. So outrageous in fact, that many stores had to shut down due to insurmountable demand. And such demand is not a force to be reckoned with. And let's not forget that the iPhone 4S was only released in China this quarter, unlike the North American release. Such a simple fact alone is enough to strike some understanding in the bears to not short this stock. Investors should have understood this fundamental fact of supply and demand. Thus, I played these earnings long, and cheers to all the other AAPL bulls. 

But at the end of the day, it's Apple, and it's a freight train.