Volatility Trading Digest - Strategy Idea Featuring Apple
Volatility Trading Digest - Strategy Idea Featuring Apple
Our indicators continue to give mixed signals as the major indexes are consolidating or correcting. The foremost concern is the continuing narrowing breadth as more money flows into fewer large capitalization stocks, which in the past has never been a bullish sign as a healthy market needs broad participation.
However, narrowing breadth does provide an opportunity to focus upon the market leaders, the most important being Apple Inc. (AAPL).
Scheduled to report 2Q earnings on Tuesday April 24 after the close the consensus estimate is 10.02 per share with a whisper estimate of 11.31 per share.
Most likely anticipating earnings report, the stock started declining Friday April 13 and it accelerated some last week. From this nervous selling activity, we conclude it is due to number leaking or it is just profit taking ahead of the report since the stock has advanced 49% since the last earnings report in January.
There is good support at 550 and it may test this level on Monday or Tuesday before the report. If the current decline has been the result of profit taking and the 2Q report does not disappoint then it may turn higher once again and take the major market indexes with it.
Here is the pertinent options data.
The current Historical Volatility is 33.40 and 26.74 using the Parkinson's range method, with an Implied Volatility Index Mean of 46.03 up from 42.47 last week. The IV/HV ratio is 1.38 and 1.72 using the range method to calculate the HV. Friday's put-call ratio was just bearish at .95 while the volume was 1,210,592 contracts traded compared to the 5-day average volume of 1,056,630 contracts.
Here is an at-the-money calendar spread using the April 27 weekly options. If the price decline continues Monday and Tuesday, adjust the strike prices accordingly.
The current implied volatility index at 46.03 reflects the uncertainty going into the report. At the 1Q earnings report in January, this index was 32. However, the current implied volatility for the weeklies was 70.53 Friday and will most likely be much higher on Monday and Tuesday. For the record, we will book the suggestion on the close Tuesday using at-the-money strike prices. The plan is close the position after the earnings report.
The suggestion above is based upon last Friday's closing prices using the mid price between the bid and ask. On Monday, the option prices will be somewhat different due to the time decay over the weekend and any price change.
Summary
While the market breadth continues to deteriorate, more money continues to flow into the market leaders as other important indicators are giving mixed signals while awaiting the outcome of the current correction and earnings reports due this week and next.
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