AAPL Options Are Probably Too Cheap

02/13/2015 8:00 am EST

Focus: OPTIONS

Mark Sebastian

Founder, OptionPit.com

Option trader Mark Sebastian, of OptionPit.com, cites an example of one stock where the underlying has been moving relative to the price of its overall options and he urges option traders not to just blindly sell options because things can get out of whack from a pricing perspective.

At any given time, over 50% of all options are overpriced.  This is why most traders like selling premium.  At the same time, another 20-30 are typically fairly priced with another 20-30% being underpriced.  This means that while it is likely that an option is overpriced, it’s not always the case. Take AAPL for instance. Take a look at how the underlying has been moving relative to the price of its overall options:

chart
LivevolX® www.livevol.com
Click to Enlarge

As you can see, not only is 10-day and 20-day HV much higher than 30-day IV, but the trend has shifted and AAPL realized vol is actually ticking higher even as IV30 stays cheap. This points toward the likelihood that an option purchased has greater odds of success than a normal purchase and might even be underpriced. 

The Lesson:

Do not blindly sell options even in popular names like AAPL, things can get out of whack from a pricing perspective.

The Trade:

We think it makes sense to own premium in AAPL.  A trade that might interest us is a long strangle with a long delta bias.  

By Mark Sebastian, Blogger and Contributor, OptionPit.com

Related Articles on OPTIONS