The AAPL Skew Gets a Bit More Inverted

Something that has been missing for a few years is finally starting to come back into the market.  That something is buyers.  Option volumes had a rough year in 2012 as most retail investors sat out and watched the politicians and governments pitch fits at each other.  The last bull cycle in the 1990s was built on stability coming off of the Savings and Loan Crisis.  Remember that?  The problems from 2008 and starting to recede from the front of the financial pages but the public is only starting to think beyond it.  It would be hard to say stability is back but it does feel better. I want to look at Friday’s rally in AAPL.

AAPL is still down from its highs but that does not mean it does not generate retail interest.  AAPL traded over 1,000,000 option contracts on Friday well above the 780k on average that usually trades.  Looking at the 3D vol skew  is helpful here.  I took a snap for Thursday after the close prior to the small rally on Friday.  Note how the volatility call skew started to move in here.

I have an OTM call selected and note how the shade is lighter as the strike prices increase near term.  The IV might be coming down but it is doing less so up top.  The volatility in the back months have stopped coming down all together.  This is the markets way of saying no big worries short term but the longer term moves are starting to catch a bid again. 

 

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The near term upside skew catching a bid is the sign of retail interest.  The bid in the back month is professional buying since the option prices as so expensive out there.  I think the mid-term volatilities are close to bottoming out. .  If AAPL actually does return some dough to shareholders, lookout above. 

I have a long position in AAPL.

The Trade

As a trade I like mid-term long call spreads in AAPL, especially on a dip, as the best way to get long and use the more expensive call skew.

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