Are AAPL options cheap enough to buy?
Are AAPL options cheap enough to buy?
There is a strange effect going on in the option market right now. Most of the actively traded options have their IV30 trading at a discount to the underlying 60 Day Volatility (HV60). Normally it is the other way around with the IV30 trading at some premium to the longer term and smoother HV60. The reason I bring this up is I was looking for 1 x 2 ratio spreads to sell (they have been working ok for us over last couple of weeks) and the breadth of IV30-HV60 flip flop was a surprise. I have a hard time Frontspreading the IV30 with this kind of setup. The problem is that the Dec cycle is now the IV30 and the market is starting to discount.
This brings us back to the subject title of AAPL. It came up in the Pit Report today and I promised to follow-up. AAPL is one of the few names where the Implied Volatility in general is getting back down to pre-August crisis level. See chart below:
The problem is the almost total collapse in the underlying volatility (HV10) over the last 10 days (down to 17.7% from 37% a week ago). That scenario would play ok for a butterfly type trade (see yesterdayís blog) but I want to look for contracts to buy because of the IV30/HV60 inversion. If I am right about the market expecting lower volatility (but keeping todayís slightly bid) I think the Dec in AAPL drops to 22% or so at the money and I will wait to buy it then. I canít quite take a bite out of the AAPL yet.
Data from IVolatility
About Mark Sebastian
Mark Sebastian is a former market maker on both the Chicago Board Options Exchange and the American Stock Exchange. Along with his role directing the path of education for Option Pit, Mark is currently the director of risk for a private hedge fund. He writes a daily blog, the Option Pit blog, formerly Option911. Sebastian has been published nationally on Yahoo Finance, Google finance, Financial Times Alphaville and is a featured contributor for TheStreet.com. He is also published regularly at SFO, the Options Insider, and is one of the Co-Hosts of The Option Block Podcast, a featured Podcast from Options Insider Radio. Mark is the managing editor for Expiring Monthly: The Option Traders Journal. Sebastian has a Bachelor's in Science from Villanova University.
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