Tuesday, January 18, 2011

Apple (AAPL) - Earnings Vol Trading Patterns and Steve Jobs News

AAPL is trading $336.98, down 3.3% with IV30™ up 24.5%. The LIVEVOL® Pro Summary is below.


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I know we've all been waiting for the quarterly AAPL earnings post, so here you go... This one is on steroids.

If you didn't know, here's the news:
1. Shares of the consumer electronics company stumbled after Apple disclosed that chief executive and company visionary Steve Jobs would take another medical leave.
Source: WSJ.com

2. AAPL announces earnings today AMC.

I've noted a few times that AAPL has an interesting pattern when it comes to earnings and earnings vol trades. First, let's look to the stock price pattern from the day before earnings to the day after.

So, a streak of eight consecutive quarters of stock price increases was broken last earnings cycle (10-18-2010). That stock price decrease however didn't change the more interesting option trading pattern. I've included the hypothetical results of selling the straddle one step above ATM on the day of earnings and then buying it back the day after (these numbers are close-to-close).

What we see here is that the short straddle has been a winner 9/9 times, with an average one-day gain of 20.8% and a relatively muted range of [14%, 28%]. This strategy takes advantage of both vol decreases and stock moves up. The fact that the stock moved down so little last cycle still allowed for a win as the vol came in so hard.


Today is an interesting situation to analyze. The front month vol would be higher today whether or not the news on Steve Jobs came out because of earnings. But, the 27.7 vol point jump in the Jan options represents a 72% one day increase - and that is likely not simply due to earnings.

With vol "super" elevated and stock "super depressed," it's very tempting to sell the vol and collect deltas. That is, in a certain sense, it's an even better time to play the 9/9 streak since there may be an even greater vol crush. Of course, it's not that easy.

The earnings report today is half (or less) of the real news. People want to know about Steve Jobs' health. Even if AAPL deflects questions regarding the subject, that might be news in itself which might move the stock. If the company does release news, well, then that's news... And that could move the stock.

There's also news about AAPL with Verizon and earnings in general. So vol should be elevated... a lot.

Let's look to the Skew Tab.

We can see how elevated Jan vol is to Feb and March. This is normal, nothing new here other than the absolute vol difference due to the Jan super vol discussed above. Note that Feb vol is up 6.8 points or 25%.

The Charts Tab (6 months) is below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

A few tings to note:
1. Check out the IV30™ peak and vol crush after earnings for the last two cycles - this is normal and not necessarily trade able.

2. The stock drop today with vol jump.

Finally, let's look to the Options Tab (below).

Possible Trades to Analyze
1. If you want to bet on a big stock move without a directional bias:
The Jan 335 straddle is worth ~$16.65, so obviously, if you buy that straddle it's a bet that the news out today will push the stock outside of the range ($318.35, $351.65). A naked straddle purchase is very risky.

The rest of these are butterflies. A butterfly buys 1 low strike option, sells 2 middle strikes and buys 1 high strike. It doesn't matter whether you use puts or calls, the point of a butterfly is that it's a bet that the stock will pin on the middle strike. The MaxLoss on a butterfly is the price paid to enter the position.

2. If you want to sell vol without a directional bias:
A few alternatives here.
2a. Very small move, the stock pins on $335.
Do the Jan 330/335/340 butterfly (using puts). Pay $0.65 with a MaxGain of $4.35 or 6.7:1 MaxGain:MaxLoss. In reality, though, the odds of this happening are quite low. I actually don't like these odds. This little $5 butterfly feels more like a $0.30 purchase, $0.65 feels too expensive. The PnL chart for this strategy ON EXPO is included below.

2b. A slightly wider range but still betting on a $335 stock price ON EXPO.
Do the Jan 325/335/345 butterfly (using puts). Pay $2.00 to try to win $8.00, or a 4:1 MaxGain:MaxLoss. That PnL chart is included below as well.

3. Ok, finally, a bet that the 9/9 pattern stays consistent. Sell vol with an upside delta tint.
3a. Do the Jan 330/340/350 butterfly (use calls). Pay $1.90 to win $8.10 for a MaxGain:MaxLoss ratio of 4.26:1. The PnL chart for this strategy is included below

3b. Finally, the same type of bet as 3a, but a wider profit zone for a smaller MaxGain:MaxLoss ratio: Do the Jan 330/345/360 butterfly (use calls). Pay $3.87 to win $11.13 for a 2.88:1 MaxGain:MaxLoss. That PnL chart is below.

4. Butterflies aren't the only approach. Call spreads and put spreads and calendars are also worth analyzing. The first step is to decide what you expect will happen on this earnings release. If you have conviction on a particular outcome, then start looking at the various ways to execute.

This is trade analysis, not a recommendation.

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