APPLE (AAPL), Trending Stock Report

Big news in the tech world this morning. Palantir and Dell are getting added to the S&P 500. But perhaps the biggest news is AAPL’s gigantic annual event where the company traditionally announces the latest update to the product line that makes up the bulk of the company’s earnings. That is, the newest iPhones.

Below we have a chart that few have ever seen. The blue line is a chart of the implied volatility of AAPL options whose term is the shortest and whose strike price is 5% below the stock’s most recent closing price. You can clearly see the spikes upward indicating earnings release pattern. If you look a bit more closely, you can see the weekly options cycle.

What we’re interested in is the pattern in early September, which is when the company makes its big iPhone announcements. Surprisingly, the size of AAPL’s post-announcement moves tend to be relatively muted.

We can see the real-world behavior of AAPL shares and compare it to what is expected by taking a glance at this chart. It displays AAPL’s actual probability distribution (columns) to the probability distribution implied by the option prices (line). The middle area represents the frequency of small moves, the tails at either end represent the frequency of large moves. You can clearly see that in the real world, AAPL shares make small moves at a higher frequency than what’s reflected in the option prices. This tells us that, if history is any guide, AAPL options are overpriced. AAPL options buyers are too optimistic that today’s event will lead to an abnormally large move.

You can see the pricing in this Volatility Term Structure chart. The highest implied volatility is in the shortest term (Friday the 13^th expiration). IV then drops until it gets to the earnings, where there is a justifiable blip higher. After that, implied volatility continues to drift lower until it gets to AAPL’s long-term volatility of 26%.

There is definitely a bit of a skew in AAPL options. The low end of the implied volatility is around 32% for strikes near the stock price, all the way up to 44% at the 200 strike. That’s a big difference. But if you look at just the 210 and 207.50 strikes, the difference is tiny – just 1 percentage point. This tells us that narrow strike credit spreads are acceptable.

Be sure to read this morning’s ODDS Online Daily Option Trade Idea to see how we are going to use the information in these charts to create a high probability trade in AAPL options.