Friday, April 11, 2014

Apple (AAPL) - An Astounding Pricing by the Market into Earnings. Did You Know This? I Didn't...

AAPL is trading $518.05, down 1.0% with IV30™ up 11.8%. The Symbol Summary is included below.

Provided by Livevol

This is a pre-earnings volatility note on AAPL and a phenomenon that I find absolutely incredible given market conditions right now.

I have written extensively about how I feel the volatility in the market is too low.  Both in specific (NFLX, TSLA, FB, SSYS, etc) and in general i,.e. VIX. By all means, please read some of them below, they are very relevant to what I see in 3-D printing stocks.

Netflix (NFLX) - How the Option Market Totally Blew It... And We Knew it a Month Ago. Momentum Stocks are Deflating... Right Now.

VIX - Has the Market Fallen Asleep or Is There Really This Little Risk Right Now?

Google (GOOG) - Risk Explodes to Multi-year Highs; GOOG's Earnings Aren't Just About a Single Company Anymore.

Facebook (FB) - Earnings Preview: Has the Option Market Under-priced Risk?

Stratasys (SSYS) - Is Option Market Reflecting too Little Risk in 3D Printing Stocks? Has the Option Market Blown it Again?

Back to AAPL.

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

Provided by Livevol

So we all know the stock story.  The largest company in the world, $700+ stock value and then... not so much after Mr. Jobs' death.  For a full history on AAPL's radical change, you can read this post, which links to several others:

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

But this is a volatility note, and a rather stunning one.  Let's turn to the IV30™ chart in isolation, below.

Provided by Livevol

I have circled the last seven earnings cycles (the blue "E" icons represent earnings dates) for AAPL and the current value..  Note how low the current level is (and yes I know that earnings aren't due out until 4-23-2014.

Let's look at this same chart but just focusing on the earnings dates, and you'll see a breathtaking phenomenon.

Provided by Livevol

There it is.  The current level of the IV30™ is below each of the last seven earnings cycles.  Two things to note:

1. Earnings are due out in two weeks, so that level of the implied should rise.
2. Why is AAPL volatility (i.e. risk as reflected by the option market) so low right now?  It's actually in the 37th percentile for the last year, so basically in the bottom 1/3 of risk. Are you kidding me?

In my opinion the risk as reflected by the option market in AAPL, above all the rest, is the most understated.

Let's turn to the Skew Tab snap (below).

Provided by Livevol

I note a parabolic skew shape for AAPL into earnings, which is normal for earnings as it reflects both upside and downside tail risk.

To read more about skew, what is and why it exists you can click the title below:
Understanding Option Skew -- What it is and Why it Exists.

Finally, the Options Tab is included below.

Provided by Livevol

OK, here we go with actual dollars.  The Apr 25 weekly $520 strike straddle prices AAPL in the range [~$492, $548 ].

  1. If you believe that AAPL will be outside that range on expiry or any date before then, then you think the volatility is too low.
  2. If you believe that range is too wide, and that AAPL will definitively be in that range on expiration, then you think volatility is too high.
  3. If you're not sure, and can make an argument for either case, then you think volatility is priced just about right.

This is trade analysis, not a recommendation.

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