Monday, July 21, 2014

* Apple (AAPL) - Earnings Preview: A Volatile & Transitory History; Unusual Present; Unknown Future

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AAPL is trading $94.17, down 0.3% with IV30™ up 2.2%. The Symbol Summary is included below.

Provided by Livevol

This is an earnings preview on AAPL and a follow up to a pair of articles.

It's time to stand up and pay attention to the largest company in the world.

AAPL - Resurrection: When AAPL Innovates, It Changes the World. AAPL Has Found its Post Jobs Identity.

AAPL - Earnings Preview: It's Time, Again, to Pay Attention to the Largest Company in the World

The forward looking risk in AAPL shares for this earnings release is low relative to historical measures but not "crazy" low (unlike NFLX).  Still, we must pay attention to the possibility of a risk malaise (risk under pricing). In either case, AAPL is alive again, downside risk is here, and upside risk is just as real as downside.

The option market is pricing in a $4.40 move off of earnings.

AAPL has found its post Jobs Identity... and a 60% Stock Rise

Earnings Review: How the Option Market Blew It... And We Knew a Week Ahead of Time.

The three-year stock chart is included below.

Provided by Charles Schwab optionsXpress

So we all remember (right?) when AAAPL crossed $700 pre-split (or $100 post-split).  That all-time high is highlighted above.  Then the ugly correction of over 40% in what was and still is the largest company in the world.  The market cap loss in AAPL as an entity made up the fifth largest company ion the United States in and of itself.  Wow...

Steve Jobs passed away and in many ways, the identity of AAPL did as well.  But something has happened... it was not immediate, there was no parade, but AAPL found its post Steve Jobs identity (see prior post above).  With that identity came a stock price rise from ~$58 to now $94 or 60% over the last year (ish).

Now... we are here.  A company that is very much Tim Cook's... and an earnings release that is, yet again, hugely anticipated.

Let's turn to 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). So, in English, that red line is the "risk" in AAPL stock price over the last two-years as priced by the option market.

The blue "E" icons represent earnings dates, and you can see that as earnings dates approach the "risk" (the red line) rises.  That's normal, expected and correct because that single day (earnings report) presents a special day of uncertainty.  Uncertainty in finance = risk.

You will also note that the "risk" (the red line) dips immediately after earnings because the news is out, the uncertainty is over.

Let's focus just on the prior seven earnings cycles and, of course, today.

Provided by Livevol

I have taken that same risk chart but deleted everything other than the earnings dates.  We can see the anticipatory risk into earnings peaked in April of 2013 and hit a multi-year low in April of this year.

That low was totally, dead, absurdly wrong. Here is my post on that event on 4-24-2014:

AAPL: Earnings Review: How the Option Market Blew It... And We Knew a Week Ahead of Time.

The stock moved $40 while the option marked priced $20 (this was pre-split). I was jumping up and down about the trough (the "Lowest Risk into Earnings") a couple of days before the event and I did trade it (thankfully).

This time around the option market is showing greater risk than last time, but it's still the second lowest risk into an earnings event in two-years. let's put some real numbers to it.

Finally, the Options Tab is included below.

Provided by Livevol

Using the at-the-money (ATM) straddle in the July 25 weekly options we can see that the option market reflects a price range of [$89.60, $98.60].

Using the Aug 1 weekly options we see a price range of [$89.20, $98.80].

  • 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 am not implying that buying volatility right now is a good trade. Actually, I'm not implying anything. This is not advice. I cannot give advice. Please don't take anything on this blog to be a solicitation to buy or sell any security, ever.

This is trade analysis, not a recommendation.

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