Checking Up on Apple (AAPL) Ahead of Earnings

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Apple (AAPL) is set to report first-quarter earnings tomorrow at 5 p.m. Analysts are reportedly expecting a dip in iPhone sales and for iPad Mini sales to cannibalize full-size (and higher margin) iPad sales. JPMorgan predicts AAPL will report $42.4 billion in revenue and 10.07 earnings per share, followed by June expectations of $38.9 billion in revenue and $9.08 EPS.

AAPL is still recovering from Wednesday's shock, when it dipped below $400 for the first time since December 2011, and then closed Friday at $390. This is a long fall from its September high of more than $700 a share. Its last tradable move came earlier this month, when it briefly held its support level of $419, rose above its 50-day moving average and hit $435 on April 10, but then took another nosedive.

No matter what AAPL reports in terms of earnings, investors will also take signals from CEO Tim Cook. Will he present a plan to increase dividend yield, offer a buyback program, or enact a stock split? So far, as his stock tanked, Cook has done little to inspire confidence in investors, presenting no plans for Apple's cash pile and pooh-poohing the lawsuit from Greenlight hedge-fund manager David Einhorn, which the billionaire eventually dropped. At this point, as AAPL has become much less attractive as a growth stock due to decelerating revenue growth and shrinking margins, and Cook needs to give value investors some reason to be excited.

I don't typically like to "gamble" on stocks ahead of their earnings reports, but I may look into an options strategy for AAPL. Normally, I would maybe look into a call spread, but in this case I may just opt for calls. If Cook announces something exciting, it could trigger a large move in AAPL, and I want to be exposed to that potential upside. However, should AAPL earnings be worse than expected, the stock could retest macro support levels of $350-$370 dating back to the fall of 2011. Naked options are a risky trade, and you should be prepared to lose every dollar that you put into such a position.

Should AAPL end up hitting the $350 level later this week -- a 50% drop in only seven months -- that could be another potential macro opportunity to enter the stock, as earnings risk would be out of the way.

Since autumn, AAPL has given traders a very expensive psychology lesson: you can't let your feelings guide your positions. There's a chance that AAPL can pick itself back up after falling from grace, but it needs to show the right numbers, starting tomorrow.

For more on Scott's strategy on Apple over the last seven months, check out his article from last week, "After Falling Below $400, What's Next for Apple (AAPL)?"

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