Tuesday, April 24, 2012

Apple (AAPL) - Earnings Vol Preview; The Option Market Takes a Stand on Risk -- It's Elevated

AAPL is trading $566.85, down 0.8% with IV30™ down 2.4% as of ~10:20am EST. The LIVEVOL® Pro Summary is below.


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Apple Inc. (Apple), along with its subsidiaries is engaged in designs, manufactures and markets mobile communication and media devices, personal computers, and portable digital music players, and sells a range of related software, services, peripherals, networking solutions, and third-party digital content and applications.

This is an earnings note – how the option market reflects an unambiguous risk premium relative to the recent past. Specifically, the vol level into earnings for AAPL is elevated relative to the past five quarters and seven of the last eight reflecting heightened stock risk.

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

I’ve chosen a longer time horizon than I usually do to point out a very interesting phenomenon with respect to vol. First, on the stock side we can see AAPL’ rise – something I’m guessing we’re all aware of. On the vol side, we can see how as of right now, the implied is elevated – that makes perfect sense given the earnings announcement due out today.

To look more closely at the implied, I’ve included the vol chart for the last two years with only the IV30™ charted, below.

I have circled the earnings vols in yellow, and drawn an horizontal line from the current IV30™ back two years. Here’s where the vol phenomenon becomes more apparent. The level of the implied today (right before earnings), is higher than every earnings cycle over the last seven (and in fact eight) earnings releases other than the 10-18-2010 cycle. To make the point a bit clearer, I’ve included the actual numbers going back eight earnings cycles, below.

Keep in mind that the IV30™ in AAPL as of this writing is 42.19%. So, again, we can see quite clearly that the risk reflected by the option market today is higher than it’s been for earnings since October of 2010.

Delving a bit deeper, check out the vol levels for both of the October dates (so, Oct 2010 and Oct 2011). You’ll note that the Oct earnings vol levels are always the highest for the four surrounding quarters. This is pretty common in that the Sep/Oct months are seen as particularly risky in the stock market – so there’s more systematic risk. I bring this rather esoteric observation up to point out that the implied vol for this earnings cycle in AAPL is essentially priced like an Oct earnings cycle – the risk is elevated to that level.

Finally, let’s turn to the Options Tab, for completeness.

I wrote about this one for TheStreet (OptionsProfits), so no specific trade analysis here. We look to the weekly options to get an idea of the vol level expressed as dollars. The Apr27 Weekly 565 straddle is priced to ~$40.90 or 7.2% of the stock price. For a rough “range” of expected values, we can say that the option market reflects that AAPL will be inside [-14%, +14%] with 95% confidence (I know that’s not really what it says, but work with me).

In any case, the vol level into earnings for AAPL is elevated relative to the past five quarters and seven of the last eight. The vol reflects the risk premium normally seen in the Sep/Oct months – a level elevated due to systematic (rather than firm specific) risk. For those that recall the GOOG earnings analysis, this is essentially the exact opposite result. You can read that GOOG post here: Google Inc. (GOOG) - Earnings Preview and Pattern; A Substantial & Unambiguous Risk Premium Statement Reflected by the Options

This is trade analysis, not a recommendation.

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