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Implied Volatility Crush in Apple Highlights Profitable Options Play

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This play is a high-probability-of-success trade that's based on the expansion of implied volatility in Apple as a result of the recent brutal sell-off.

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The recent massive sell-off in Apple (NASDAQ:AAPL) stock has presented some interesting opportunities for low risk trades. For long time readers of my articles, you may recognize that my portfolio usually contains an AAPL position.

Why? I cannot overemphasize the importance of trading liquid instruments, and in the current world, very few underlying issues have options with the degree of liquidity routinely available in a wide spectrum of strike prices and expiration dates.

What is the big deal about liquidity? When markets trade in an orderly fashion it is usually possible to negotiate a reasonable price for all but the most illiquid underlying. However, when blood is running in the street, market makers will routinely widen bid / ask spreads and attempt to extract well more than a pound of flesh. It is only in the most liquid series that any hope of a reasonable exit in these times can be found.

OK, the sermon is over; I like AAPL! For those who have not looked at the option chain for AAPL since last Thursday, I want to call attention to another new aspect of the tremendous flexibility that exists in this name. Entirely new sets of weekly options are now trading, not just those for the next upcoming Friday expiration.

This means as I type on Tuesday morning, I can trade liquid options for calendar year 2012 that expire in 3, 10, 17, 24, or 31 days. That is a lot of choices and will allow us to exploit a never before level of granularity in constructing our trades.

The trade I would like to discuss is a high-probability-of-success trade that is based on the expansion of implied volatility in AAPL as a result of the brutal sell-off that has brought the stock from its recent highs a bit over $700 to its current price of $565 despite Monday's neck snapping $30 / share rally.

As regular readers know, the first characteristic I evaluate in seeking a high probability trade is that of the current status of implied volatility. AAPL is one of a handful of stocks that have listed values for implied volatility.

As an aside, the history and current status of implied volatility is discernible for all stocks having listed options, but may require access to a broker database or one of several fee based sites.

The current status of implied volatility for AAPL, symbol VXAPL, or CBOEEQUITYVIXONAPPLE (^VXAPL), is shown below:



As is obvious, the value has "come in" recently but still remains in the upper half of its recent range, particularly when excluding the characteristic spike in volatility preceding the recent release of third quarter earnings in October. Since currently elevated levels of implied volatility indicate that options are rich on an historic basis, it seems logical to consider a trade that benefits from selling these rich assets.
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No positions in stocks mentioned.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

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