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This happens every single time Apple gives an earnings report. AAPL rises before the report and falls after the report. If I had the money I would short the st

This happens every single time Apple gives an earnings report. AAPL rises before the report and falls after the report. If I had the money I would short the stock every single time.

Nrsolis 13y ago
That's not how shorting works. You short the stock and NOW YOU HAVE THE MONEY but you OWE the stock to whomever you borrowed it from. If the stock goes up, you lose. If it goes down, you use the cash you have to buy it back and keep the rest.
- Perceval 13y ago
  I don't have the money to lose if the stock goes up.
  - baddox 13y ago
    And that just means you aren't actually that confident about your prediction, just like the rest of the market.
    - Nrsolis 13y ago
      BOOM. The price of that uncertainty is what you capture in the options pricing model. aka. "premium" Two scenarios: (Short-selling) AAPL: Sell 10 lots (1000 shares) short -> now you OWE someone 1000 shares but have the cash in your account of 1000 shares worth of AAPL stock. The next day, AAPL loses 99% of its value, you buy the shares back at their now 1% value, deliver them to the person you borrowed them from, and keep the rest of the cash in your account. OR, the next day, the shares DOUBLE, and now you owe that person shares that are worth twice as much as you got selling them in the first place. Bad news. Nearly 100% loss on the trade. (Buying a Put Option) You buy 10 AAPL PUT contracts (100 shares each) "at the money" (strike price equal to the last sale of AAPL) for $XX that expire at some point in the future (lets say one month). Anytime between now and then, if the price of AAPL doubles, your PUT OPTION may most-likely will be worth more than what you paid for it and you can sell it for whatever the market wants to pay for it. If you do nothing, at the end of 30 days, your option is worth exactly ZERO. The difference in the price movements of the underlying securities in both scenarios is what makes up the premium you pay OVER AND ABOVE what the difference is between what the security trades at and the price you paid for that "option" on the security.
- encoderer 13y ago
  It's like you understand the theory but not the practice of how this works? In reality, you "short" a stock by purchasing a Put option. For example, these are made up numbers, but if you thought Apple would tumble on earnings and wanted to short it, you'd buy, say, $525 put options. This is a contract to sell 100 shares of apple at $525. It's worthless if they trade above $525 but if it drops below, you're in the money. Suppose you pay $150 per contract, and you short 1000 shares -- 10 contracts. The most you can lose is $1500. And if the stock tumbled down to, say, $475, you would make $525-$475 = $50 * 1000 shares = $50,000, or $48,500 profit. But the most you can ever lose is what you paid for the options.
  - mdemare 13y ago
    Shorting and buying put options are not the same thing.
    - Nrsolis 13y ago
      And that's exactly it. The commenter doesn't understand the wildly different processes or effects of going those two different routes. For one thing, a put (or call) option doesn't even trade on the same markets (usually), has a lot less liquidity (usually), and depends on the supply of people willing to write contracts against positions they already hold. (non-naked) Options also have the effect of limiting any possible loss to the price paid for the option. When you short a stock, your loss is potentially UNLIMITED. In practice, your broker will buy the stock for you with whatever cash you have on hand if the price moves against you. That doesn't happen with options but you also don't get the huge sums of money to play with by borrowing against a stock that you don't own but are positive will dive into the dirt. edit: explanation.
    - encoderer 13y ago
      Sorry man, but this is just incorrect. Taking a short position on a security is a strategy. Buying Puts is a tactic. Short Selling is also a tactic. Both accomplish the same goal of holding a short position -- making money when the price drops. If you want to take a short position, you can buy Puts. And to wit, if you're a retail investor wanting a short position, this is most often how you'd do it. Trading the derivitive here is a smarter play for precicely the reason I mentioned: It limits risk. Liquidity on the options market doesn't matter at all because if the price rises, your Puts are worthless anyway. And if it drops, you don't need to sell the contracts, you can execute them (on margin if necessary) and unwind the position that way.
- minimax 13y ago
  Yeah but you can't short anything without a margin balance. So for a retail account you need something like $100 in margin balance for every $300 of the short position. You can't open a trading account with zero balance and just start short selling things to raise cash.
  - Nrsolis 13y ago
    Of course not, but it's trivial to create a synthetic short position with an almost zero cash balance. Not EXACTLY zero, but close enough. e.g. short a low beta stock, hedge that position, short the higher beta stock, and hedge that position.
    - minimax 13y ago
      short a low beta stock, hedge that position, short the higher beta stock, and hedge that position. That just sounds like gibberish TBH...
      - Nrsolis 13y ago
        What part didn't make sense? If you're not familiar with "the greeks" as they relate to tradable securities, then why worry about hedging at all? Just buy and hold.
        minimax 13y ago
        He is a retail trader. He's going to have to have a margin balance larger than "almost zero" to put together whatever sort of position you have in mind unless you're just talking about buying far out of the money puts.
        Nrsolis 13y ago
        Your almost zero might have fewer zeros than my almost zero. But my point still stands: it's trivial to create a synthetic short position that's dollar neutral.
JoelSutherland 13y ago
That would be a terrible plan. Apple stock raises on average 2.1% the day after an earnings announcement: http://www.thestreet.com/story/11505061/1/where-will-apple-trade-after-earnings--poll.html http://www.thestreet.com/story/11505061/1/where-will-apple-t...
- this_user 13y ago
  Not necessarily. AAPL has been trading differntly since the fall of 2012. Whereas it used to spike on earnings, it now tends to sell of. When using statistical data like this to make actual investment decisions, you should always look at the behaviour for different time frames and see if it stays the same for the most recent intervals.

This happens every single time Apple gives an earnings report. AAPL rises before the report and falls after the report. If I had the money I would short the stock every single time.

Nrsolis 13y ago

That's not how shorting works. You short the stock and NOW YOU HAVE THE MONEY but you OWE the stock to whomever you borrowed it from. If the stock goes up, you lose. If it goes down, you use the cash you have to buy it back and keep the rest.

Perceval 13y ago
I don't have the money to lose if the stock goes up.
- baddox 13y ago
  And that just means you aren't actually that confident about your prediction, just like the rest of the market.
  - Nrsolis 13y ago
    BOOM. The price of that uncertainty is what you capture in the options pricing model. aka. "premium" Two scenarios: (Short-selling) AAPL: Sell 10 lots (1000 shares) short -> now you OWE someone 1000 shares but have the cash in your account of 1000 shares worth of AAPL stock. The next day, AAPL loses 99% of its value, you buy the shares back at their now 1% value, deliver them to the person you borrowed them from, and keep the rest of the cash in your account. OR, the next day, the shares DOUBLE, and now you owe that person shares that are worth twice as much as you got selling them in the first place. Bad news. Nearly 100% loss on the trade. (Buying a Put Option) You buy 10 AAPL PUT contracts (100 shares each) "at the money" (strike price equal to the last sale of AAPL) for $XX that expire at some point in the future (lets say one month). Anytime between now and then, if the price of AAPL doubles, your PUT OPTION may most-likely will be worth more than what you paid for it and you can sell it for whatever the market wants to pay for it. If you do nothing, at the end of 30 days, your option is worth exactly ZERO. The difference in the price movements of the underlying securities in both scenarios is what makes up the premium you pay OVER AND ABOVE what the difference is between what the security trades at and the price you paid for that "option" on the security.
encoderer 13y ago
It's like you understand the theory but not the practice of how this works? In reality, you "short" a stock by purchasing a Put option. For example, these are made up numbers, but if you thought Apple would tumble on earnings and wanted to short it, you'd buy, say, $525 put options. This is a contract to sell 100 shares of apple at $525. It's worthless if they trade above $525 but if it drops below, you're in the money. Suppose you pay $150 per contract, and you short 1000 shares -- 10 contracts. The most you can lose is $1500. And if the stock tumbled down to, say, $475, you would make $525-$475 = $50 * 1000 shares = $50,000, or $48,500 profit. But the most you can ever lose is what you paid for the options.
- mdemare 13y ago
  Shorting and buying put options are not the same thing.
  - Nrsolis 13y ago
    And that's exactly it. The commenter doesn't understand the wildly different processes or effects of going those two different routes. For one thing, a put (or call) option doesn't even trade on the same markets (usually), has a lot less liquidity (usually), and depends on the supply of people willing to write contracts against positions they already hold. (non-naked) Options also have the effect of limiting any possible loss to the price paid for the option. When you short a stock, your loss is potentially UNLIMITED. In practice, your broker will buy the stock for you with whatever cash you have on hand if the price moves against you. That doesn't happen with options but you also don't get the huge sums of money to play with by borrowing against a stock that you don't own but are positive will dive into the dirt. edit: explanation.
  - encoderer 13y ago
    Sorry man, but this is just incorrect. Taking a short position on a security is a strategy. Buying Puts is a tactic. Short Selling is also a tactic. Both accomplish the same goal of holding a short position -- making money when the price drops. If you want to take a short position, you can buy Puts. And to wit, if you're a retail investor wanting a short position, this is most often how you'd do it. Trading the derivitive here is a smarter play for precicely the reason I mentioned: It limits risk. Liquidity on the options market doesn't matter at all because if the price rises, your Puts are worthless anyway. And if it drops, you don't need to sell the contracts, you can execute them (on margin if necessary) and unwind the position that way.
minimax 13y ago
Yeah but you can't short anything without a margin balance. So for a retail account you need something like $100 in margin balance for every $300 of the short position. You can't open a trading account with zero balance and just start short selling things to raise cash.
- Nrsolis 13y ago
  Of course not, but it's trivial to create a synthetic short position with an almost zero cash balance. Not EXACTLY zero, but close enough. e.g. short a low beta stock, hedge that position, short the higher beta stock, and hedge that position.
  - minimax 13y ago
    short a low beta stock, hedge that position, short the higher beta stock, and hedge that position. That just sounds like gibberish TBH...
    - Nrsolis 13y ago
      What part didn't make sense? If you're not familiar with "the greeks" as they relate to tradable securities, then why worry about hedging at all? Just buy and hold.
      - minimax 13y ago
        He is a retail trader. He's going to have to have a margin balance larger than "almost zero" to put together whatever sort of position you have in mind unless you're just talking about buying far out of the money puts.
        Nrsolis 13y ago
        Your almost zero might have fewer zeros than my almost zero. But my point still stands: it's trivial to create a synthetic short position that's dollar neutral.

JoelSutherland 13y ago

That would be a terrible plan. Apple stock raises on average 2.1% the day after an earnings announcement: http://www.thestreet.com/story/11505061/1/where-will-apple-trade-after-earnings--poll.html http://www.thestreet.com/story/11505061/1/where-will-apple-t...

this_user 13y ago
Not necessarily. AAPL has been trading differntly since the fall of 2012. Whereas it used to spike on earnings, it now tends to sell of. When using statistical data like this to make actual investment decisions, you should always look at the behaviour for different time frames and see if it stays the same for the most recent intervals.