Tuesday, August 19, 2014

* Apple (AAPL) - All-time High & 3 Huge Risk Profile Changes Mean: Completion of a New Identity

Share on StockTwits

AAPL is trading $100.36, up 1.2% with IV30™ down 0.2%. The Symbol Summary is included below.

Provided by Livevol

"Expectations are rising for Apple’s (AAPL) newest iPhones, coming next month, which will carry larger screens and possibly fatter profit margins. With Apple’s rumored iPhone introduction less than a month away, Asian factories have already cranked up production on the next version of the popular smartphone, generating numerous leaks of new features. Apple shares are up 16% over the past three months, as anticipation builds."
Source: Apple set to expand phone size — and profits

This is a stock and volatility note on the largest company in the world that has just hit an all-time high.

As AAPL stock moves higher its risk profile has changed as well, moving from a risk malaise to a more elevated level.  In fact, this is the third risk profile change for AAPL, the first starting with the passing of Steve Jobs.  It's the final of these risk profile changes that (may) bring us to a point of equilibrium.

It's time to stand up and pay attention to the largest company in the world.

This is a follow up to a note I wrote on 7-21-2014:
AAPL - A Volatile & Transitory History. Unknown Future. It's Time, Again, To Pay Attention to the Largest Company in the World

AAPL has found its post Steve Jobs Identity... and an All-time High

In that prior post I wrote:
  • It's time to stand up and pay attention to the largest company in the world.
  • AAPL has found its post Jobs Identity... and a 60% Stock Rise

The three-year stock chart is included below.

Provided by Charles Schwab optionsXpress

AAPL has seen three cycles in the last three-years.

Cycle #1: The stock rose 100% since Nov 2011 and ~800% since 2009.
Cycle #2: The stock fell ~45% after hitting its all-time high over the next year.
Cycle #3: The stock has risen 80% since hitting that low in Jun 2013 and is now at an all-time high.

While Steve Jobs passed away on Oct. 5 2011, the real issue(s) with AAPL started about a year later (and thus the stock drop). The company had no identity... it really didn't. I wrote about it in a seven piece series, the final one is included below.

AAPL - Part 7 (The End): This Just Isn't the Company it Used to Be... And it Never Will Be Again.

But then... everything changed:

AAPL - Resurrection: AAPL Has Found its Post Jobs Identity.

That change has now pushed AAPL to an all-time high and it also changed the risk profile... again.

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).

In English, the red curve is the risk in future stock price movement.

Risk Profile Change #1: "What the Hell is Going on with this Company"
We can see at the beginning of this chart (the left hand side) while volatility (risk) rises into earnings (the blue "E" icons") and then falls, in general, that red line is above the yellow line I drew in myself (which is the current risk).

In other words, with the passing of Mr. Jobs, AAPL was viewed as a much riskier entity than it is now.  That risk profile change is incredible and circumstantial evidence that the value of this firm is now close to equilibrium value than it was during that "risky"period.

Risk Profile Change #2: "There's No Risk Here at All"
In fact, the option market got so comfortable with AAPL, I wrote this:

AAPL - Earnings Preview: Astonishing & Unprecedented Phenomenon is Happening Right Now.

The risk was so low it was just... well... stupid... The stock popped on earnings, moved  more than the option market had priced and then... the risk started dropping further.

In fact, the risk hit a multi-year low in May (see that little green circle I drew in that volatility chart).

Risk Profile Change #3: "Equilibrium"
That's when the second risk profile change began.  Simply stated, the risk has risen from those lows up to the yellow line.  It's this second risk profile change that points to a sort of equilibrium.

Risk High --> Risk Low --> Risk Equilibrium

And now we have a stable equity valuation (per the option market) and the highest stock price ever.

Finally, the Options Tab is included below.

Provided by Livevol

Using the at-the-money (ATM) straddle we can see that the option market reflects a price range of [$94.50, $105.50] by the end of trading on Sep 19th.

I have no opinion about that range, other than to say, the option market is pricing in ~5% range (up and down). Now that feels like a reasonable range for this firm.

  • 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.

This is trade analysis, not a recommendation.

Legal Stuff:
Options involve risk. Prior to buying or selling an option, an investor must receive a copy of Characteristics and Risks of Standardized Options. Investors need a broker to trade options, and must meet suitability requirements.

The information contained on this site is provided for general informational purposes, as a convenience to the readers. The materials are not a substitute for obtaining professional advice from a qualified person, firm or corporation. Consult the appropriate professional advisor for more complete and current information. I am not engaged in rendering any legal or professional services by placing these general informational materials on this website.

I specifically disclaim any liability, whether based in contract, tort, strict liability or otherwise, for any direct, indirect, incidental, consequential, or special damages arising out of or in any way connected with access to or use of the site, even if I have been advised of the possibility of such damages, including liability in connection with mistakes or omissions in, or delays in transmission of, information to or from the user, interruptions in telecommunications connections to the site or viruses.

I make no representations or warranties about the accuracy or completeness of the information contained on this website. Any links provided to other server sites are offered as a matter of convenience and in no way are meant to imply that I endorse, sponsor, promote or am affiliated with the owners of or participants in those sites, or endorse any information contained on those sites, unless expressly stated.

No comments:

Post a Comment