OPTIONS

JW Jones of Options Trading Signals details an uncommon option strategy trading the implied volatility crush in AAPL that can lead to robust profits.

The recent massive sell off in Apple (AAPL) stock has presented some interesting opportunities for low risk trades.

AAPL is a useful vehicle for an option trading portfolio to use. 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, sermon is over; I like AAPL! For those who have not looked at the option chain for AAPL since last week, 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 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 $584 despite last week’s neck snapping $30/share rally.

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), is shown below:

AAPL Implied Volatility Chart

chart
Click to Enlarge

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Tickers Mentioned: AAPL, VXAPL