Apple (AAPL) - How the Option Market Continues to Understate Risk. And We Know It.

AAPL is trading $506.32, down 8.0% with IV30™ down 28.6%. The Symbol Summary is included below.


Provided by Livevol

This is a quick follow up to the earnings preview published on Sunday for AAPL.  You can read that prior post by clicking on the title below:

Apple (AAPL) - Earnings Preview: Has the Option Market Mis-priced the Risk in Earnings?

There is a trend forming where I believe the option market is understating risk, and rather substantially. Here are links to two other ones:

1-21-2014: Netflix (NFLX) - Earnings Preview: "Less Risk in This Firm Now than In the Last Two-Years." Do You Agree? I'm Not Sure I Do.

12-26-2013: Twitter (TWTR) - UPDATE: How the Option Market Totally Blew It, And We Knew it Two-Weeks Ago.


Back to AAPL, the takeaway from that prior post, as the title reads, was simply that the risk as reflected by the option market in AAPL shares for earnings seemed far too low. I wrote in the prior post:

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"So now we have a fascinating situation where the risk in AAPL shares as reflected by the option market is lower than six of the last seven earnings cycles while the VIX is substantially higher now than that one outlier when volatility was lower."
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The Chart that demonstrated that depressed volatility phenomenon is included below.


Provided by Livevol

What We See
The horizontal line I drew in makes it easier to see the current level of the implied (as of Sunday afternoon) relative to the last two-years. And what do we see?...

The level of the implied volatility (i.e. the level of the risk reflected by the option market) for this earnings release is lower than six of the last seven events. The last time volatility was below this level into earnings was the summer of 2013.

And now we can turn to the Options Tab as of Sunday night and today, respectively.

Sunday

Provided by Livevol

Today

Provided by Livevol

The $545 straddle was the ATM on Sunday night (it was actually $550 right before earnings on close Monday).

That $545 straddle went from ~$31 to now ~$38.8 or a 25.2% rise in one day.

If we look as of Monday's close (which is when most people probably traded), the $550 straddle went from $29.00 to $42.70 or 50.8% rise.

In any case, unhedged straddles were probably not the trade the majority of people investigated, but ultimately, the option market, again, mis-priced risk (under stated risk) in a big name.

Other recent ones:

1-21-2014: Netflix (NFLX) - Earnings Preview: "Less Risk in This Firm Now than In the Last Two-Years." Do You Agree? I'm Not Sure I Do.

12-26-2013: Twitter (TWTR) - UPDATE: How the Option Market Totally Blew It, And We Knew it Two-Weeks Ago.


This is trade analysis, not a recommendation.

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