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- Apple is set to report quarterly earnings after the closing bell on Tuesday.
- JPMorgan has identified the perfect options trade to play the report, based on the firm's bearish overall near-term outlook on the stock.
- Watch Apple trade in real time here.
As Apple prepares to announce its second-quarter earnings after Tuesday's closing bell, JPMorgan is urging investors to take all possible precautions.
First and most notably, it's not a fan of Apple's stock fundamentals at the moment. The firm is particularly concerned about weakening iPhone orders, a trend its supply-chain team sees continuing through the end of the June.
Transform talent with learning that worksCapability development is critical for businesses who want to push the envelope of innovation.Discover how business leaders are strategizing around building talent capabilities and empowering employee transformation.Know More By JPMorgan's estimation, the 2018 iPhone super-cycle peaked earlier than usual, and there aren't any imminent design changes that could reinvigorate consumer demand. The firm also notes guidance from Taiwan Semiconductor - a chipmaker that works closely with Apple - suggests further downside to 2018 iPhone targets.
This is overshadowing the positive effect of the newly passed GOP tax plan, says JPMorgan. Although the firm, along with many others, expects Apple to use its mountain of repatriated overseas cash to boost share prices through the repurchase of stock, it says the end effect will fail to overrule the iPhone slowdown.
Second and perhaps most troubling, JPMorgan says it may not even matter if Apple results beat forecasts, because traders have been applying broad selling pressure to tech shares this earnings season, regardless of individual company performance.
"The Apple narrative appears weak both fundamentally and technically, and it is unlikely to change significantly in the near term as the market is selling both strong and weak technology earnings results," said Shawn Quigg, an equity derivatives strategist at JPMorgan. "We believe the reward-risk dynamic favors further downside."
With all of that established, JPMorgan isn't going to let you fly blind into the after-market earnings report. It offers the following trade recommendation, which is known as a bearish risk reversal - a trade that will profit from a sharp stock loss.
- Buy Apple $150 weekly puts and simultaneously sell $177.50 weekly puts, both expiring June 1
"If Q1 results are better than expected, the report comes amid a wash of mixed technology results and news, which will likely mute any Q1 related rally," said Quigg. "Conversely, if Q1 results disappoint, we believe the stock could have a larger than average earnings-related decline, owing to a potential catch-up trade."
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