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Tuesday, January 18, 2011

Playing AAPL Earnings with options

Well, well, well, earnings seasons fellas!! Lovely.
Taking a look at the volatility numbers of AAPL, the January options, yes the ones that expire in 3 days have caught the attention of investors and the interest has just been sky rocketing, with mixed news of earnings, plus their CEO taking some vacs due to medical reasons. This interest in the options have made volatility explode which translates into options being over-priced a.k.a too expensive.
My idea is to play this with a Double Calendar. Selling front month options (January) and buying February options with the same strike prices for protection at intrinsically cheaper prices due to lower volatility in February options (In reality February options cost more money because they contain time premium, but they are considered to be intrinsically cheaper due to the lower volatility affecting them). And I know I have said in the past that trading neutral positions on stocks is dangerous as they move faster than indexes but the volatility skew between January and February is so huge that it creates some very interesting positions with good profitability ranges, one of them I am about to comment right now.

First look at the volatility skew between January and February at 2:00pm, January 18:
(Click on Image to enlarge)

My position was filled as follows:
(Click on Image to enlarge)

PROFITABILITY RANGE: APPLE between 324.18 and 363.03 in the next 3 days.

(Click on Image to enlarge)

The profitability range is for expiration date, but almost 100% certain I wont keep it more than 2 days, This is a position I will be getting out of as soon as volatility in January crushes, decreasing the value of the options I am shorting (i.e selling) and thus yielding some profit.

As of this writing AAPL is trading in the low 340's. It would have to fall 16 points or go up over 23 points to break my profitability range. I think the odds are in my favor. Look at past earnings dates and the range of the movements the day after earnings for this stock and you will see it is difficult for my profitability range to be broken by tomorrow.

That's all folks!! Will follow up on this one probably tomorrow after I close it.

See how this trade played out one day later

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