How do you like them AAPLs?

The equity market had a pretty stunning reversal this afternoon.  Essentially it rallied 1% from the lows of the day and the VIX took it on the chin to drop .67 to 16.45. Maybe a combination of the ADP report not being so bad and less silly rhetoric out of Washington got everyone into the holiday spirit.  One place it did not help was AAPL.

Below is a closing snap of the intraday volatility surface in AAPL. Each little spike is the implied volatility per strike with calls on the left and puts on the right.  Anything in dark green has IV up 10% or more for the strike.  As you can see the IV took off today as AAPL had another 5% downswing.  Volume is up quite a bit in there so someone has huge amounts of stock to go.  That is turning AAPL into a stock with very high realized volatility.

 

3D volatility surface from OptionVision

 

I brought this up as a topic in our Pit Report today.  What does a trader do when the IV is super high and the HV is super high?  AAPL rarely trades at IV levels this high outside of a financial crisis or an earnings cycle.  The realized volatility is driving everything.  From a trade point of view traders do not want to own Vega at this level nor do they want to be short too much Gamma either.  AAPL is in scary land for option trading.  This situation calls for something more subtle. The only trade that really looks good is a short ATM calendar.  Why?  This trade shape sells Vega and buys Gamma.  The stock just needs to move.  It is not for the faint of heart because the theta is still pretty big but I think it is best to bring a gun to a knife fight.  The short calendar only works in very few situations.

The Trade

Sell an AAPL Dec/Jan ATM calendar (time spread).  Unless you have portfolio margin the requirement will be prohibitive.  Also, only traders with experience should even attempt a short calendar but I think the same about trading AAPL right now as well.  i do not recommend this as the first short theta trade. There is no doubt AAPL is a tough trade.  So much for the easy up days….

This is the type of training you will learn in our gold course.  If you needed help following this trade, you should be in that course.  Register here, or call us (888) for more info.

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