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With earnings and iPad news out of the way, volatility is dropping in Apple (AAPL) options
Beth Gaston Moon is the Senior Editor for the Options News Network. Beth was a member of the research department at Schaeffer's Investment Research for more than a decade. January 28, 2010 8:25 EST Related Symbols: AAPL
Right now, Apple (NASDAQ: AAPL) is arguably the hottest stock on anyone’s radar screen. During any given 30 seconds, thousands of people are posting about the company on Twitter. Earnings were Monday night (the company surprised to the upside by $1.60 per share) and yesterday was the much-ballyhooed unveiling of the “iPad,” a $499 tablet-style computer that will support e-book technology and video streaming. Apple is marketing the product as a midway point between a smartphone and a traditional laptop. After a quick plunge following the initial announcement, Apple recovered to close up $1.94 for the day at $207.88.
And now that all of this excitement is out of the way, Apple may begin to cool down a bit. Implied volatility on the shares has completely collapsed in recent days, with these two major events out of the way. Last Friday, ahead of Monday evening’s options report, the February at-the-money (200-strike) straddle closed at $21.83. The front-month at-the-money straddle dropped to $19.65 on Monday, hit $16.38 on Tuesday, and closed Wednesday at $13.83. This still projects a move of 6.6% (higher or lower) during the next three weeks or so, but that’s a long way from the 11% that was predicted just a few sessions ago.
During AAPL options trading on Wednesday, nearly all of the attention was focused on front-month options. The out-of-the-money February 220 and 230 calls were of particular interest. The 220 strike saw almost 64,000 contracts hit the tape on open interest of 65,815, while the 230 strike saw 44,436 contracts trade versus open interest of 52,133. Some of these traded to open and others traded to close, as open interest was only slightly changed at both strikes.
Around 2:00 PM Eastern time, mid-sized and large blocks changed hands on both of these calls, all of which were marked as a spread. By the close, the implied volatility implosion was in full effect, with both options losing value despite the move higher in the underlying stock. The chart below illustrates how the stock finished higher on the day while the 220-strike call drifted lower.
It appears as though investors sold the 230 calls and bought the 220 calls, paying about $1.10 for the potential bull call spread. Maximum profit is limited to $8.90, while the risk is 100% of the premium paid. This is a return on risk of about 800%, but breakeven is $221.10, a 6.4% increase from current levels.
More on AAPL:
Apple introduces new $499 iPad tablet computer
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