The market is usually fickle about earnings.? It is always a case of what have you done for me lately.? AAPL is now no exception.? When the future always looked brighter the name would rally day after day.? Now the stock is really in a tail spin.? Instead of talking about $500 as a buy point that number is $50 out of the money.? That does not stop the AAPL faithful and a look at the implied volatility after earnings in this case might be helpful.
The volatility surface is a lot more readable in OptionVision this way.? The red you see is a drop in implied volatility for the day.? The building height is the implied volatility of the options at the time, which was on the close Thursday.? As you can see that was a pretty big drop as the dark red is a 25% in this case.? Note where the skew is most pronounced with the spikier buildings.? The out of the money calls expiring next week have the highest implied volatility as we discount the ITM calls because of the bid/ask spreads. ??I selected the AAPL Feb 1 Weekly 520 call for emphasis.? The options expiring today I discount because the vega per option is so small.? Even working down the term structure in the next few Weeklys the calls are trading with a solid premium to everything else.? As far as the market goes, a run back up to $500 is getting priced in.? The upside, almost but now quite, looks like the skew in the VIX.? Note the rate of decline in implied volatility after earnings was less so in the OTM calls.? I had the OTM puts trading at lower values yesterday than the OTM calls at the same distance from the ATM strike.? While $400 might be possible there just is not the demand in the options yet.
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One of the best time to trade options is after a big move.? The market tends to get dislocated and there are ?some opportunities around. The fact that AAPL is trading well into the 30 realized volatility range for the last couple of months makes buying some back month options after earnings interesting.? The month to month skew makes it even more interesting. ? Sometime the better trades happen after earnings.? At least this time it does.
The Trade
I like the upside time spreads in AAPL to take advantage of the goofy AAPL skew. ?You can add an OTM put spread as well. ?We had a variant of this trade on in AAPL already in our Strategy Letter and closed it midday. ?I think this is a very tradable position until the skew re kinks. ?The 30% IV level looks like it can hold since AAPL is clearly not the same stock as it was this time last year.