An AAPL Anomaly Just in Time for Earnings
An AAPL Anomaly Just in Time for Earnings
Well we had a snoozer of a day just when the market thought it could catch a bid. The only thing that really got sold was the VIX. It pitched over the cliff to trade 15.71 by the end of the day. The seesaw around NFP on Friday begins. Since Bernanke can’t do a QE4 less than a month after QE3 the market seems to be reassessing the kind of move we can make. A decent report will give things a boost no doubt.
Something more interesting is happening in AAPL. I know earnings are coming out (Nov cycle by the looks of the ATM straddles) and AAPL has been a turkey with lips since hitting $700 but the volatilities are doing some interesting things. What has not been quiet is the intraday swings of the largest market cap company in the world. Robust daily volatility has a habit of jacking up the short term implied volatilities which in this case would be October. The October cycle caught up to the November cycle in terms of volatility which is a rare occurrence. Take a look at the chart below.
charts by livevol (r) www.livevolpro.com
That AAPL volatility in the near term skyrockets into earnings is no real surprise (yellow circles). But what happens to the near term volatility in the off cycle month? It dies a quiet death. The only thing holding up October is all the daily movement right now and usually AAPL gets a little quiet right before the announcement since no one really knows what to do. Note the little green circles that shows what happens off cycle to the IV30/IV60 relationship. The IV30 (in this case Oct) starts to fade. I think this easily can happen again just like it has happened before. The trade I have in mind should generate some cheap Nov options going into earnings or just close it on October expiration.
The Trade
An AAPL Oct/Nov strangle swap makes the most sense. The idea is damp down the short gamma but keep then short volatility exposure in the front month (think long Nov and short Oct). Since AAPL is moving place the stangles at least 25 handles from the ATM strike. I like the 625/700. I don’t see Nov volatility declining into earnings.
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