At any given time, over 50% of all options are overpriced. This is why most traders like selling premium. At the same time another 20-30 are typically fairly priced with another 20-30% being underpriced. This means that while it is likely that an option is overpriced, its not always the case. Take AAPL for instance. Take a look at how the underlying has been moving relative to the price of its overall options:
FB announced earnings tonight. While we saw some decent fire works out of AAPL, we did not see the same thing out of FB. The market was pricing in a move of about 7%. As I write this the stock has barely budged. The short strangle/straddle is goign to pay out extremely tomorrow, Shorts will make about 4-5 hundred dollars a spread. The payout is pretty clear below:
Look for the Option Pit Store to open soon!
The market did not like CAT or MSFT earnings today. It actually felt good to know stocks could sell off on bad news instead of the heroin induced QE state of suspended animation that has taken over equity prices for the last couple of years. I don’t think the MSFT earnings were 10% bad but the market did not agree with me. We are not talking MSFT, we will talk AAPL.
The news is out Apple is going to have the I-Phone 6 AND the I-Phone 6 PLUS!!! Plus APPLE PAY and the I-Watch. Based on what the stock did, the market acted to the AAPL conference much like McKayla Maroney would to a Silver Medal. With that the VXAPL got smoked. Even more so, the VIX options expiring this week and next week took it in the chin. That being said, it appears the market is still holding out hope for some more movement here is a chart of VXAPL:
The big news right now is that AAPL did not announce any new hardware. There are hints and the developers like the new software, but the bread and butter of hardware is still not announced yet. That makes this conference a little different in that AAPL has held up pretty well after the big rally going forward. How it reacts next week is anyone’s guess.
As I write this the AAPL WWDC is going full tilt and the stock has not been able to hold up for most of the day. Granted it had a near $40 run up last week, $606 to $642, so a pullback is not out of the cards. That run also helped push the SPX to record highs on not the greatest news in the world. Part of that run is helping to damp down the volatility a bit in the big indexes of which AAPL is a part.
This is why we don't sell cheap straddles: We noted yesterday that AAPL IV was at extremely low levels into its earnings announcment today. Looking at a two year chart of AAPL 30 day IV one will notice this was the cheapest IV has been over that period of time.
LivevolX (r) www.livevol.com
There was another nice little rally today on the back of some decent earnings reports. The tech end of the market has largely shrugged off the GOOG earnings and is looking forward to FB and MSFT. Note how I did not mention AAPL.