Tuesday, July 20, 2010

Apple (AAPL) - Earnings Strategy Scalps Vol and Delta Patterns 8 Straight Quarters

** UPDATE ** 3:15 PM EST

As the market nears the close we can identify the straddle to sell in AAPL in the vol and delta bet trade described below. It looks like the stock will close above $250, so the 260 straddle is the sale @ ~$24.70.

The Earnings & Divi stats have been updated below to reflect this straddle (instead of 250).

--------- END UPDATE ---------

AAPL is trading $246.15 with earnings today AMC. The LIVEVOL™ Pro Summary is below.

For the last eight earnings cycles AAPL has followed a consistent pattern. Namely, the stock has gone up from close to close each time. The stock stats by earnings cycle are included (click to enlarge).

The upward move in stock price has sometimes been so great that it made the front month ATM straddle a purchase ahead of earnings for the one day trade; at other times, the move up has been smaller and the ATM straddle was a sale for a one day gain.

One pattern that has worked eight quarters in a row has been to sell the straddle one strike above ATM on the day of earnings and then to buy it back the day after. This takes advantage of the stock move up AND the vol move down. The stats for this trade are included (click to enlarge).

We can see an average 20.9% one day gain with a range of [14%, 28%]; i.e. not that volatile. This 20.9% return is relative to the 4.5% from just holding stock AND allows for downside moves as well.

The Options Tab (click to enlarge) as of ~11:30 EST for AAPL is included (click to enlarge).

We can see the straddle one higher than the ATM is Aug 250 as of right now (may change before the day is over). The Aug 250 straddle is worth ~$24.25 to a seller slightly worse than mid market. The weekly options now add another twist. Since AAPL earnings are today AMC, the results will filter into the option prices tomorrow. That makes the weeklies essentially all earnings vol (as they expire on Friday AMC).

The July (W) 250 straddle is worth ~$15.60. Since these options expire so soon, we can actually put a PnL range to expo for them. Specifically, this trade wins if AAPL is in ($234.40,$265.60) by Friday close.

The Skew Tab snap (click to enlarge) illustrates the vols by strike by month and does a wonderful job of exhibiting the pure earnings vol in July.

We can see how high that red line is relative to every other month. The Weeklies present a riskier trade since the straddle sale receives so much less relative to Aug - that means, much less room to be wrong. However, it also offers the possibility of a massive win, as once earnings go, the options will drop to just a bit over parity pretty quickly.

Very interesting... just to be really, clear, this is a very risky play, (either straddle sale) regardless of the past theoretical success. AAPL can move $50+ in a day on earnings if the news is big enough.

This is trade analysis, not a recommendation.

Legal Stuff:


  1. Agree with your thoughts on AAPL. I have played the stock off of earnings and done well. Continue your great analysis... Like the updated site!!!
    Lynn Hoggan

  2. One could try the JUL (4)'s and the AUG as a straddle/strangle swap...it gives you the chance to sell the fat IV in the weekly without as much risk.

  3. real nice I am always impressed with your stuff, keep up the good work!

  4. Your analysis serves as a great way to learn about options trading for newbies like me. Please keep up the good work.