AAPL, VXAPL Acting Rational Again

Many of you might recall that, in the face of many angry AAPL lovers, we here at Option Pit were pointing out how screwy the volatilities of AAPL options were.  We were even quoted in the Economist and the Wall Street Journal on how irrational the pricing of AAPL options was; you can read what our thoughts were here.  However, to save you time, here is the basic synopsis of what AAPL was doing as it rallied from 500 to 650.

When AAPL bounced off its all time low IV's in February and began to run toward 650 options IV's inverted.  Calls became more expensive than puts, and as the underlying rallies, implied vols rallied with it.  It causes AAPL to move from 600 to 635 and VXAPL to move from 34% to over 42% over the same period of time.  This is extremely unusual and something I hadn’t seen since the tech bubble.  

Why do I bring this up?  Because AAPL rallied 30 points today.  I was interested in whether the VXAPL moved the way I would expect (down) or the way it had been moving back in March and early April.  Take a look at the 3 major moves up AAPL made prior to earnings and notice what VXAPL did.  In each case, VXAPL went up (the yellow circles).


Now take a look at the orange circle (today's move).  What do we notice about AAPL IV? It came in!  This is great news for traders, and it presents us with an excellent opportunity to trade AAPL again.  IV in AAPL is still somewhat elevated; I think it is heading back to the low 20's in the near term, as AAPL has a good shot to rally to 600 here.  Traders that are long can now set up collars and call spreads and expect them to perform as expected.  This makes hedging MUCH easier.

The Trade

I love the idea of a bullish AAPL fly or a simple AAPL call spread.  I would be looking to get short vega here.  I also think AVSPY might be an interesting call buy here.

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