Before Results Come Out, Apple's Options Offer Safety Play for Investors

(Reuters) -- Apple Inc has been in many ways an unstoppable stock, and that has been even more the case after earnings. Going back eight years, on the day after the release of results, its shares have risen 70 percent of the time.

But with Apple having hit a record high just a few days ago, many in the options market are playing it safe, with some guarding against a mild decline in shares following its release of results on Tuesday after the market close.

Apple shares, which hit a record high of $431.37 on January 19, are up 5.4 percent so far this year. On Monday the shares closed at $427.40, up 1.69 percent on the day.

It's hard not to be an eternal optimist given the stock's performance - the shares have had only one down year since 2003. The average analyst price target is now around $515, and just about 1 percent of the shares are sold short.

But Apple's path has not always been straight up. After streaking to new highs, the stock has been prone to sharp pullbacks.

If I were a long holder in Apple... you may want to consider protection, as the last three times Apple has made all-time highs, the stock has sold off about 10 percent, said Dan Nathan, a founder of riskreversal.com, a New York-based firm specializing in options trade ideas.

Apple logged new highs in late July, late September and mid-October.

Apple weekly options are pricing in an expected move in the shares of about 4.8 percent in either direction, said Joey Kunkle, a founder of options analytics firm OptionsHawk.com in Boston.

That expected move is above the average 2.80 percent one-day post-earnings move over the past four quarters, according to Bespoke Investment Group of Harrison, New York.

Apple options volume on Monday was just below average daily levels as traders exchanged about 126,000 puts and 208,000 calls, according to options analytics firm Trade Alert.

For the past week, calls have outpaced puts by almost two to one in volume, suggesting bullish sentiment heading into earnings, which is very typical for Apple, Trade Alert President Henry Schwartz said.

But the overall action does not tell the whole story. There is a steep skew - the difference in premium between downside puts and upside calls - headed into results.

An equity put option grants the right to sell the stock at a fixed price any time up to expiration while a call conveys the right to buy shares at preset price.

Traders with long stock positions are bidding up downside puts to protect gains while a lack of interest for upside calls suggests limited gains on earnings, Kunkle said.

The heaviest activity appears to be among investors recently selling put spreads, which pays them a premium and assumes that the stock will stay above $390 by this Friday.

The clamor for downside protection by shareholders had bid up the price of Apple puts as investors looked to lock in recent all-time highs in the stock.

Put spreads were sold last week and were likely the work of traders taking advantage of the expensive premium environment using this limited risk strategy, hoping any decline in shares is small.

Option traders last week were utilizing bull put spreads to wager that Apple shares will hold long-term support at $395 if shares were to sell off on earnings, Kunkle said.

Kevin Pleines, equity market analyst at Birinyi Associates in New York, said that Apple's shares since 2004 have gained about 70 percent of the time after earnings, with an average gain of 2.4 percent from the close prior to results to 8 a.m. the next morning.

Apple shares could be seen overbought, especially after recent highs, but this is a stock that can stay overbought, Pleines said. It's not a reason to sell the stock.

On Monday, the January weekly $425, $430 and $440 calls were fairly busy, while the February $430 calls also active with a decent size buyer of the February $445 calls, Nathan said.

(Reporting By Doris Frankel and Angela Moon; Editing by David Gaffen and Leslie Adler)