Wednesday, January 27, 2010

AAPL Vol & Skew Update Number #2

AAPL is trading 209.82. The LIVEVOL™ Pro Summary is below.

Pre-earnings Vol Blog: HERE

Post-earnings Vol Blog: HERE

The news is out on the iPad and its pricing; the news is out on earnings as well. I have included the skew pre-earnings (with market dipping), post earnings and now after the iPad news. I find this progression an interesting study in the movement of the months relative to each other and the skew shape with impending news; I hope you do too. Click any image to enlarge it; note the movement of the front month(s) (red and yellow).

Skew legend:
Red - Front Month
Yellow - Second Month
Green - Third Month
Light Blue - Fourth Month

As a volatility event approaches (earnings, news, etc) the month it occurs in naturally rises higher than others. It's simple math really - here's a contrived but illustrative example.

Say a stock has normal vol of 20 on a standard day. Say a vol event (FDA decision for a drug or earnings, or whatever) has a vol level of 150.

Say there are 10 days to front expo and the vol event is in five days. Then the front month vol will be an average of:

Front: 20, 20, 20, 20, 150, 20, 20, 20 ,20 20

Second: Front + 20, 20, 20, 20, ..... for 22 days.

Third: Front + Second + 20, 20, 20....

So they vol event is "diluted" by fewer "standard vol days" (20 in this case) in the closest month.

Technical detail: Note the term average is used loosely here as you cannot average standard deviations - you must square , then average then square root.

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