Tuesday, July 8, 2014

* Apple (AAPL) - Earnings Preview & Resurrection: It's Time, Again, to Pay Attention to the Largest Company in the World

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AAPL is trading $95.27, down small with IV30™ up 5.5%. The Symbol Summary is included below.

Provided by Livevol

I wrote a post on 5-27-2014 when AAPL was trading ~$89 (split adjusted).  This is a follow up to that post:
AAPL - Resurrection: When AAPL Innovates, It Changes the World. AAPL Has Found its Post Jobs Identity.

The forward looking risk in AAPL shares is low relative to historical measures and with earnings approaching, we must pay attention to the possibility of a risk malaise (risk under pricing).  AAPL is alive again, downside risk is here, and upside risk is just as real as downside.  It's time to stand up and pay attention to the largest company in the world.

Yesterday (7-7-2014), AAPL hit an annual high and as of that time was up ~37% in the last year. Today is a small down day. The one-year stock chart is below.

Provided by Charles Schwab optionsXpress

Check out that move from the ~$75 level in late April as well as the move up since May (lots of arrows to look at).  Again, AAPL has now found its post Steve Jobs identity. Whether it's "good" or "bad" we are yet to see, but it's finally here.

In reality, Cook is taking Apple in new strategic directions, making it more difficult for competitors to follow. He is also focusing on areas that will boost profits – the key to Apple’s share price trends, both up and down – as much as revenue. And while new products may be important, Cook is pursuing just the sort of steady improvements that have historically been the key to Apple’s biggest gains.

Source: Yahoo! Finance, Poor, misunderstood Tim Cook is making all the right moves, written by Aaron Pressman

Let's turn to the risk. The IV30™ chart in isolation, below.

Provided by Livevol

The implied volatility is the forward looking risk in the equity price as reflected by the option market (IV30™ looks forward exactly 30 calendar days).  Note the blue "E" icons represent earnings dates and I have circled them.  Actually, let's just focus on the earnings dates, the chart below does that:

Provided by Livevol

The peak 'risk' level into earnings was 45% on 4-12-2013.
The trough 'risk' level into earnings was 27% on 4-22-2014.

Note that the trough was the last earnings release and the stock moved hugely more than the option market priced.

The 'risk' level today is 25.5%, but that is going to rise into earnings on 7-21-2014. It is not appropriate to compare the 25.5% number to those other numbers quite yet. Don't get distracted by the divergence... soon, it will be real, but we must get closer to the event date

The Skew Tab snap (below) illustrates the vols by strike by month.

Provided by Livevol

To illustrate the risk of earnings visually compared to non-earnings options we can look at the Skew Tab.  The yellow curve are the July monthly options that expire on 7-18-2014.  The green curve are the Jul 25 weekly options.  Since earnings are due out on 7-21-2014, it's that green curve that holds the event and the divergence between the two (that blue arrow) reflects explicitly the risk of earnings.

For the record, the July 25 options are priced to 31.48%.  That will rise substantially.

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

Using the at-the-money (ATM) straddle (in yellow) in the July 25 weekly options we can see that the option market reflects a price range of [$89.70, $100.30].

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

I think AAPL is going to be outside that range at some point either before or after earnings but before July 25th. Or, said differently, I think volatility is too low. Just a dude's opinion -- not a lot of conviction either way.

But please don't trade on my opinion, for what it's worth, I am not trading AAPL earnings.

This is trade analysis, not a recommendation.

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