Making a bet on the AAPL April 24, 2012 earnings release – playing a Strangle or an Iron Condor – which does the class want to do?? What would Steve Jobs want us to do? Actually, we had better not care about that, because (a) he would want us to go long probably, and we may not want to, and (b) he may not approve of this kind of speculation in general. As of 7:37 AM PDT, Monday, April 23 , 2012, NASDAQ Composite @ 2637.80, AAPL to report 1st Q earnings Tuesday April 24, 2012 after close. Earnings estimates at $9.95 per share and $36 million in revenue. For commentary, see http://finance.yahoo.com/blogs/ breakout/apple-earnings-preview-another-upside-surprise-123836352.html A strangle or an iron condor on AAPL’s earning reports tomorrow – which is it? Note: This is taking it to the limit – these options will expire 3 days after the report. AAPL almost always has a near-perfect fit (high-volume and stable). HDV stable and consistent with market and a couple of 3 sigmas in the last year, not unusual. Max loss we can make on the upside (if AAPL soars above 615) is $29. Loss on the downside if AAPL goes below 535 is $13. We can also use May options but will really lose the advantage of time decay if we do that. Here we are taking advantage of the over-stated volatility of these ultra short-term options and hoping that AAPL stays between (more or less) 580 and 555. How I Would (and might) Trade This ... I would try to shave off this gap between bid and ask by spending some time placing limit orders in between, starting with our strangle hedge, the 615 Call at 4.90, the 535 Put at 9.20, and then once the hedge is in place, simultaneously put in limit orders for the 555 Put at 17.00 and the 580 Call at 16.20, then as soon as one executed I would cancel the other limit order and come it at Best Ask and complete it (e.g. if I got the Put at 17, then I would accept the Call at 16.30. Note that if you use this method, you have to accept the values jumping around for the trades that you have not completed. Strategy: For either the strangle or the condor, you exit all within a hour of market open on Wednesday the 23rd, the day after the earnings release. How an automated system might address this ... [O] Have your news sensitivity estimator or 3-sigma history database pull down a report for AAPL. [M] Have your historical volatility crawler pull down all historical daily volatility estimates for AAPL. [M] Have your strangle estimator systematically pull out call and put options prices for the nearest term contract (Apr) and the next (May) for the options closest to the money, then moving out in increments of the next two or three strike prices (depending on the density), presenting all IDVs to you for review. [M] Have your iron condor estimator do the same as the strangle calculator, except treating the near-term strangle as a short, and going deeper than the strangle calculator to find way-out-of-the-money strangle hedges (the hedge part of an iron condor is obviously a cheap strangle). [O] Using something like your HW1 probability calculator, calculate the probability of staying within a designated condor range. [O] Given an alpha estimator and the distortion that you will see in IDVs, calculate the expected value of each bet.