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.
No talk about the VIX today. Option Pit covered the movements in the blog the last two days, so it is probably time to move on to the other VIX-like products. Other VIX-like products you say? Well, AAPL is so big that it has its own VIX, so let’s take a look at it.
As many of you option traders know, the VIX closed below 15 for the first time in some time. While I think the VIX is getting pretty cheap, when we look at all of the equity vol indexes, some equities look even cheaper. There are few things to remember:
1. While a 15 VIX might seem low after the last 4 years, it would have been above normal between 2004 and 2007.
2. There are always things that are more cheaply priced.
3. There may be trades that are more expensive in relative terms.
Think again! One of the things I am constantly working on with my options mentoring students is the understanding of when to buy and sell volatility. Early in their options education, they often will point toward things like "option vols are cheap' or "the VIX is high." This is a great start; however, it is not the whole banana. One of the real keys of understanding options is not only knowing when option prices are cheap or expensive but, also, when to sell cheap or expensive options.
Google taught my options mentoring students a nice lesson on getting long premium into earnings; it usually pays to play the day before earnings, not the day of. Because the ATM straddle that was purchased on Wednesday was a huge winner, while the ATM straddle purchased yesterday was a loser. Thankfully, most students actually had on the long calendar we looked at during the pit report, so they all came out ahead.
Typically, after earnings, we will see implied volatility come out of a stock's options. This is because what was once unknown is now known. When there is less uncertainty, there is less volatility. And on Google’s move today, we can clearly see that volatility fell:
One of the things we encourage our option mentoring students to dig into is the study of volatility. We want all of our traders educated on reading volatility. One nice way to trade IV's is the CBOE Equity VIX indexes; the one we are watching today is VXAPL.
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 inthe Economist andthe Wall Street Journal on how irrational the pricing of AAPL options was; you can read what our thoughts werehere.
With all of the AAPL excitement over AAPL earnings, I thought I would skip the discussion on the price action of AAPL earnings on the SPX and the NDX. I am even going to skip the discussion on the affect of AAPL earnings on VXAPL. Instead I thought it would be interesting to discuss the ramification of AAPL earnings on the major volatility indexes themselves.
AAPL is by far the largest player in the NDX and the largest player in the SPX. On a day when the market did little to nothing we watched the VIX get smoked (a function of SPX options), while the SPX picked up half of yesterday's loss, the VIX lost about 60% of yesterday's gain. VXN also go beat pretty good as well. Now let’s take a quick look at VXAPL: