Tuesday, January 7, 2014

Apple (AAPL) - Earnings Preview and a Remarkable Risk Profile Change... For Now...

AAPL is trading $42.41, down small with IV30™ up 0.2%. The Symbol Summary is included below.

Provided by Livevol

Apple Inc. (Apple) designs, manufactures and markets mobile communication and media devices, personal computers, and portable digital music players, and sells a variety of related software, services, peripherals, networking solutions, and third-party digital content and applications.

I have written about AAPL extensively over the years and I highly recommend reading the older posts as we saw the firm literally change in front of our eyes from one firm to another with respect to risk as perceived by the market.

You can read any of the prior posts by clicking on the titles below. For a slightly quicker review, you can go to the last one listed (9-11-2013), which summarizes all of the prior posts (I have highlighted that one in yellow).

But today, I will focus on earnings and how the option market is pricing it.  I'll do a follow up the day before earnings and compare it to the analysis today.

Apple (AAPL) - Have We Moved into a Totally New Volatility Paradigm for This Company? Has Everything Changed?

Apple (AAPL) - Everything has Changed. The Old AAPL is No More. The New AAPL is a Riskier Entity and the Market Doesn't Know What that Means Yet.

Apple (AAPL) - "Just the Facts Ma'am" -- Well, that Supports the Opinion: "Everything has Changed. The Old AAPL is No More."

Apple (AAPL) - This Just Isn't the Company it Used to Be... And it Never Will Be Again.

Apple (AAPL) - Earnings Preview Reveals Lots of Information; But There is No More 'Old AAPL' -- That's Not Good or Bad... It Just is.

Apple (AAPL) - Post Earnings Analysis; Risk Paradigm Shift Over; Now the Market Gets It

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

Today: 1-7-2014

Let's start the analysis 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).

Provided by Livevol

On the stock side we all know the story.  The stock saw prices above $700, then prices below $400, and now we're in a relative equilibrium of ~$550.  AAPL is still the largest company in the world by market capitalization (by a lot) and the cash it has on hand is about the size of Citigroup's (C) entire market cap at ~ $150 billion.  Whoa.

But this is a volatility note, and there is a lot to be seen. Let's turn to the IV30™ chart in isolation, below for the same time period (two-years).

Provided by Livevol

The blue "E" icons represent earnings dates, which is where I want to focus.  I have highlighted the max volatility that was reached into the prior seven earnings cycles in yellow.

What We See
There are four consecutive earnings dates where the 30-day implied volatility was higher from one earnings date to the next, and then we see an incredible drop-off.  That drop was a reflection by the option market of much less uncertainty in AAPL's earnings release.

The stock moved from $418.99 to $440.51 (a $21.52 stock rise from 7-23-2013 to 7-24-2013).  The at-the-money weekly options priced in a range of ~[$400, $440], so in a sense, the newly depressed risk reflected by the options was exactly spot on.  I have included the Symbol Summary from close the day after earnings were released.

Provided by Livevol

The next earnings cycle (the last earnings cycle showed elevated risk relative to the 7-23-2013 release, but still considerably lower than that period of rising risk. That 10-28-2013 earnings release saw the stock move down $13.20 which was much smaller than the last move both in absolute dollars and in percentage terms.  Note a 5.1% move compared to a 2.5% move.  I have included the Symbol Summary from close the day after earnings were released.

Provided by Livevol

OK... So, what about now?...

I have included the same volatility chart below as above, but just included the earnings date vols - to make it easier to see.

Provided by Livevol

So, there are arrows and lines and circles and blah blah blah... The point here is simple:  There is a chance that the implied volatility going into the upcoming earnings release for AAPL will be the lowest it has been in two-years.  If that's the case, the option market reads: "AAPL risk into earnings is lower than it has been for the last two-years of earnings cycles." I think that's incorrect.

Huge Caveat
AAPL earnings come out on 1-27-2014 and today is 1-7-2014.  So, in that time it's almost an absolute certainty that IV30™ will rise in to that earnings date.  The point here... The conclusion drawn today is in error or at the very least, not time appropriate.  I'll do this same analysis the day before AAPL earnings, and let's see where we sit then.

For completeness, I have included the Options Tab, below.

Provided by Livevol

Note that the Jan31 weekly options as of right now price in a range of about [$501, $579] at the end of that week.  We'll revisit that number in a few weeks pre- and post-earnings.

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