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AAPL: Butterfly Sellers Lose, Straddle Buyers Get Creamed

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There was a good reason for yesterday's strange AAPL skew structure from yesterday:  traders thought AAPL was going to move less than the straddle price.  Take a look at the closing options prices from AAPL yesterday.

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LivevolX (R) www.livevol.com

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How To Capture Edge Buying Options

One of the questions Andrew and I get most is "How do I find edge in the market place?"  There are thousands of ways to do it, and many of them take years of training and trading to learn.  There are also ones that are much simpler than they may seem.  One way of capturing edge, that Andrew and I like is buying options in stocks that have vols that are at multi-year lows, especially when they are high flying stocks.

One clear example is AAPL last year.  Right before the stock ripped from the high 500's to the 700's the IV on calls was at an all-time low.

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Livevol (r) www.livevol.com

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Downside Skew is pancake flat in AAPL

 

There was a slight selloff today on what used to be good economic news.  Better growth in Europe this time last year would have put us off to the races.  The SPX was also almost 300 handles lower.  That is right 300 handles.  Mark has been writing about how cheap AAPL IV has been and for a comparison AAPL was $130 higher last year in the teeth of the Euro Zone issues. 

With AAPL making a $50 move what has been happening to the IV?  It has been going straight up.  Today AAPL managed only a $9 gain as the rest of the market crapped out.  Can Icahn really be the catalyst for a more than 10% move?  Didn’t we have shareholder activist funds at the beginning of the year pounding the table to get AAPL to do something?

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VXAPL is Still Cheap

We have been commenting for some time how cheap AAPL IV is.  While the news that Carl Icahn is buying 1 billion dollars worth of AAPL cause the stock to move and the implied volatility of the options to increase just because an options price goes higher, doesn't mean that opportunity is lost.  Take a look at the closing price of the VIX of AAPL (VXAPL).

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Livevol (R) www.livevol.com

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In Stocks Vol Can Drive Vol: AAPL

Over the last earnings of AAPL I was flabbergasted at how little AAPL IV moved both ahead and after earnings.  The stock basically sat there spinning as IV dipped lower and lower into the earnings calls.  Many traders (me included) got beat bad playing the earnings volatility ahead of the announcement.  

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Livevol (r) www.livevol.com

After earnings the stock continued to have NO movement in volatility.  This makes little sense in a high flyer like AAPL...Until I looked at stock and option volume numbers in the last few weeks.

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AAPL is the new MSFT!

Back in the old days before the 3rd QE and Mario Draghi promised to support the Euro the SPX was trading 1329 and the market had one star, AAPL.  Today feels like old is new again with AAPL lovers back after a not awful earnings report and pretty much everything else down.  Gold, bonds, oil and stocks in general all are taking a breather from the recent run and the lack of great news locally gave investors pause.  The strange thing is that Europe actually rallied today on a pickup in demand.  For whatever reason AAPL was again the star and the post earnings volatility acted like it.

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AAPL Straddle is Cheap

Typically ahead of earnings, whether there are weekly options or not, Options on AAPL will catch a big bid.  Prior to earnings, I expect to see IV in Livevol somewhere north of 40 into an earnings cycle.  This is not happening in AAPL options right now.  Despite earnings being next week, 30 day IV is below 30%.

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Livevol (r) www.livevol.com

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ZNGA lives!

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.

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Retail Investors are Getting Killed

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:

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LivevolX (R) www.livevol.com

If we want to add in a third media darling, we can add Facebook.  Here is a chart of the returns of these two trades:

So AAPL is deciding what to do with all their cash?

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.

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