Take Another Bite of This AAPL

01/16/2013 8:00 am EST

Focus: OPTIONS

Mark Sebastian

Founder, OptionPit.com

Volatility in this stock continues to ramp up as it sets to announce earnings next week. Mark Sebastian of OptionPit.com offers a trade idea based on an earnings surprise.

We all know that AAPL has had a rough couple of months.  The stock has moved up and down $200 in the last six months. The company has earnings next week and I wanted to put into perspective how much the fear is priced into options right now. Take a look at this chart of AAPL stock and IV.

chart
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Click to Enlarge

The vol is a lot higher than it was last earnings, despite the fact that AAPL had taken a dive from over 700 to near 600. If we compare straddle prices with about the same time to expiration I think it becomes even more clear.

This is a straddle from October 18 2012.

chart
Livevol® www.livevol.com
Click to Enlarge

Here is the straddle price today:

chart
Livevol® www.livevol.com
Click to Enlarge

AAPL is a full 130 dollars cheaper than its price last October, yet the current straddle price is actually more expensive. To make matters better, the skew of calls and puts relative to ATM options is super steep. There is protection buying left and right in this stock.

The Trade:
This could point toward some sort of temporary bottom especially if AAPL holds 500. I think there is some downside left in the stock, but its back below 500 million in valuation. I actually think if AAPL surprises next week it will be by beating analyst expectations, which I expect to drop over the next few days. I think the vol is overpriced as well, I might look to sell an iron condor in this name.

By Mark Sebastian,Blogger and Contributor, OptionPit.com

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