I want to characterize today with movement. AAPL trades from 441 to 422, GOOG trades from 894 to 916 and PCLN from 789 to 808. Stocks are moving again and I alluded to that yesterday that the realized volatility for names is starting to pick up. VIX managed up .04 but really the story is that stocks are moving and the reason is money is coming back into the market. I think this means that things that really were not possible with positions most of last year are possible now. You can buy some options and have a shot at making money. Let’s look at a stock in the basement, ZNGA.
I am a firm believer that the mini options are going to be a great thing for the retail trader long term, as long as the retail trader can steer clear of Television. There are 2 trades we hear more about on CNBC than any other trades. Those trades are GLD and AAPL. CNBC chatter is indicative of where the retail trader is investing. I wonder why the retail trader is still out of the market:
With the market recovering some of the sell off yesterday, we look at more mundane features in the market. Redistributing some of AAPL's cash hoard comes to mind. AAPL rallied to the $480’s earlier this year on the new cash payout hype so here we are again looking for another excuse to goose up the stock into earnings.
Let’s review the rules for dividends as it pertains to options.
First- Call values do not like dividends and put values do. A dividend increase will decrease call values and increase put values.
That does not mean that a big cash payout is not BULLISH. It can be, but the dividend will affect the relative movement of call and put options.
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.
The market is usually fickle about earnings. It is always a case of what have you done for me lately. AAPL is now no exception. When the future always looked brighter, the name would rally day after day. Now the stock is really in a tail spin. Instead of talking about $500 as a buy point, that number is $50 out of the money. That does not stop the AAPL faithful, and a look at the implied volatility after earnings in this case might be helpful.
Goldman put out a comment prior to earnings season, which was something that I happened to agree with. It basically pointed toward the fact that, while the VIX was overpriced relative to market movement, it didn't mean the component parts IV's were necessarily overpriced. Their main point was that it might not make sense to sell premium in individual names; in fact, they might be a buy. At the same time, SPX IV is probably still a sale. Something that might confirm the low SPX expectations are the overall flat VIX curve and the low JCJ (CBOE Correlation Index). Let's quickly break down the trade
We all know that AAPL has had a rough couple of months. The stock has moved up and down 200.00 in the last 6 months. The company has earnings next week and I wanted to put into perspective how much the fear is priced into options right now. Take a look at this chart of AAPL stock and IV.
The Vol is a lot higher than it was last earnings, despite the fact that AAPL had taken a dive from over 700 to near 600. If we compare straddle prices with about the same time to expiration I think it becomes even more clear.
As I watch the market today most of the volatility is coming from AAPL. Traders still cannot get past the fact that AAPL has changed into a slightly different stock lately. This is something that I call a change in a stocks “personality”. Specifically is the realized volatility the same as it has always been or has it become something else? AAPL does not normally stay at this level of realized volatility for this long. It is usually a gap and then pretty much mid to low 20’s in realized volatility.