Tuesday, October 21, 2008
Apple Volatility Too Cheap
Apple Computer at-the-money (ATM) straddles have dropped approximately 20% in the last few sessions to 18 dollars despite the earnings risk tonight. But, I would not be a seller of AAPL premium given the pullback in implied volatilities. The AAPL November 95 straddle is currently trading at 18 bucks suggesting that option traders are discounting a 19% move in AAPL shares between now and expiration (31 days left until expiration). On the surface, the premiums look attractive to sell when you compare the price to the historical AAPL straddle price ahead of earnings. But, this is not the case when you compare the AAPL ATM price to the ATM straddle on the S&P 500. For example, the SPY November 96 straddle is discounting an 11% move in the index by expiration based on the price of the SPY ATM straddle (November 96 straddle). Clearly, AAPL premium sellers are not being compensated for the risk. I doubt that AAPL straddles will trade at a steep discount to the SPY Novemer 96 straddle price even if the stock trades unchanged after the earnings report. So, best case, a straddle seller will be looking at a 7-8 dollar gain despite taking a lot of gamma risk. Apple option premiums should be higher given the fundamental backdrop. I would consider being long out of the money calls and puts (skewed to the put side as I think the downside is greater near-term) as a "cheap" way to speculate on a significant move in the shares following the earnings (some traders will say I am crazy to call the premiums cheap but that is what makes a market; relative to SPY options, AAPL premium is too cheap). Defined risk/long premium strategies are the only way to speculate on AAPL shares given the uncertain consumer discretionary environment and impact consumer weakness could have on forward guidance.