Apple reports fiscal second-quarter earnings Thursday after the bell, and something unusual is happening in its options market. One measure of downside risk has fallen precipitously in the past five weeks as traders turn bullish and it has done so heading directly into the earnings print. Traders are ready for fireworks. Apple's average one-day move following earnings has been 2.2% over the past 12 quarters but options imply that this cycle's move will be nearly 3.6%. Bracing for a larger-than-normal move makes sense if you're worried about how higher oil prices might impact consumer spending on Apple's devices or have questions about the transition from Tim Cook to John Ternus. Tariff uncertainty around components sourced out of China and the broader question of where iPhone demand goes in the back half of the calendar year give traders plenty of reason to pay up for protection going into the print. But while the option market is predicting the move will be larger than normal, one metric gives insight into what that market is saying about direction and the message is good news. RiskDex is the measure of how expensive AAPL put options are relative to call options and it has fallen precipitously in the past five weeks (you can see the three-year chart of AAPL RiskDex below). On March 25, the reading was 2.92, the highest in the last three years, and at midday on Wednesday it had declined to 1.36 — a drop of more than 50%. That means traders are aggressively bidding for call options to get upside exposure while ignoring the put options that would hedge downside. The message from the option market is clear; traders expect good things from Apple this cycle. If you think the market is too optimistic about Apple and the company's guidance will recognize that crude oil above $100 a barrel could hurt iPhone sales, then shareholders could execute a collar (selling a covered call and using the proceeds to buy a protective put) to take advantage of expensive call options and relatively cheap put options. Done correctly, the collar can be put on for little or no net debit while still capping downside if Thursday's report disappoints. However, if you think the option market has it right and Apple delivers a clean, in-line quarter as the macro fog lifts, there are other strategies that make sense. For example, with the shares at $269.25, traders could buy the 275/285 call spread for 2.12. Buying a call spread reduces the impact of higher call prices and also eases the volatility crush that follows earnings, since the short call you are selling against your long call gives back some of that elevated premium. The maximum loss is the 2.12 paid for the spread and that will be realized with AAPL below 275 at expiration. But the maximum profit is 7.88 and that will be realized with AAPL at or above 285 at expiration. That is a payoff of nearly four-to-one on a stock the option market itself is signaling will move higher, not lower, and it does so with risk that is fully defined the moment the trade is opened. Apple is a market darling and with good reason. It has a market cap of nearly $4 trillion, and its products are ubiquitous. But blind bullishness isn't enough. When the more steely-eyed option market seconds the positive sentiment then traders should heed the signal. DISCLOSURES: None. All opinions expressed by the CNBC Pro contributors are solely their opinions and do not reflect the opinions of CNBC, or its parent company or affiliates, and may have been previously disseminated by them on television, radio, internet or another medium. THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSTITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL'S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.
