Monday, June 2, 2014

* Apple (AAPL) - Risk Elevated in the Immediate-term for WWDC: Will AAPL Deliver on the Promise of Innovation?

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AAPL is trading $629.90, down 0.5% with IV30™ up 1.1%. The Symbol Summary is included below.

Provided by Livevol

This is a follow up to my post on May 27th which you can read here:
Apple (AAPL) - Resurrection: When AAPL Innovates, It Changes the World. AAPL Has Found its Post Jobs Identity.

"Later this year, we've got the best product pipeline that I've seen in my 25 years at Apple"

The risk in AAPL shares is elevated right now -- this week, the immediate-term.  We will see soon if AAPL delivers, over-delivers or under-delivers on its new found promise of innovation, a pipeline better than any in the last 25-years and a corporate identity outside of Steve Jobs.

As the title indicates, AAPL has finally done something that the market has digested as innovative in the post Steve Jobs era.  An new identity is forming, finally. The stock has seen a huge rise (a gain in market cap larger than the market cap of 450 out of 500 of S&P companies).

The news today: Tim Cook is speaking... right now at WWDC.

The Charts Tab (two-years) is below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

Provided by Livevol

We can see the huge run-up since AAPL hit its annual low of $379.67. The stock is up 66% in less than a year. That rise is equivalent to ~$210 billion in market cap, which alone would make the ~14th largest company in the world (approximately the size of Proctor & Gamble).

But, the real talk of the town isn't that rise, but rather, the last month. Check out the stock chart since the day of the earnings release on 4-23-2014.

Provided by Livevol

That 21% rise is basically the size of Boeing (BA).  But now that the rise has happened, we are left with risk.  Risk that AAPL will actually deliver.  Risk that the rumors will turn into facts.  Risk that AAPL is actually innovating.  With a $65B rise in the last month in company value, the equity market has placed its probability on "yes."  The option market reflects the increased risk, even as the stock rises.

Let's turn to the IV30™ chart in isolation, below.

Provided by Livevol

The implied volatility is the forward looking risk in the equity price as reflected by the option market (IV30™ looks forward exactly 30 calendar days).  Check out that rise of late.  The old axiom "volatility rises as stocks drop and volatility drops as stocks rise" is simply a banal and casual observation driven by supply and demand factors. I detail that below in a link.

For now, the risk is that AAPL delivers (or under delivers or over delivers).  And we can see explicitly the risk in the conference right now in the skew.

The Skew Tab snap (below) illustrates the vols by strike by month.

Provided by Livevol

Check it out -- the red curve represents the Jun 6 weekly options, while the green curve represents the Jun monthly options.  Two clear phenomena:

1. Both expiries show parabolic skew, which in English means the option market reflects both upside and downside tail risk

2. The red curve is above the green curve, which in English means that the option market reflects mor risk in the immediate-term (this week) than in the  next three-weeks.  That immediate risk is WWDC.  In fact, it's right now as Tim Cook speaks.

To read more about skew, what is and why it exists you can click the title below (supply and demand factors):
Understanding Option Skew -- What it is and Why it Exists.

Finally, the Options Tab is included below.

Provided by Livevol

Here we go.  The option market reflects a price range of [$614, $646] for AAPL by the end of trading this week.

  • If you believe the stock will be outside that range on expiry or any date before then, then you think the volatility is too low.
  • If you believe that range is too wide, and that the stock will definitively be in that range on expiration, then you think volatility is too high.
  • If you're not sure, and can make an argument for either case, then you think volatility is priced just about right.
Let's see if AAPL delivers, over delivers or under delivers on its new found promise.

Here's some news from right now:
"Later this year, we've got the best product pipeline that I've seen in my 25 years at Apple," Eddy Cue,  Apple's senior vice president of internet software and service,  said last week at the Code Conference . "I believe the products we've got coming are great."

Source: BUSINESS INSIDER via Yahoo! Finance: Apple's Enormous Year Finally Starts Today, written by Jay Yarow.

This is trade analysis, not a recommendation.

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