Apple Volatility looks to increase before earnings – Nov Straddle looks good

AAPL-Volatility

 

Apple (AAPL) releases earnings on Oct 25th, in about 2 weeks. What trade could you put on right now with relatively low risk ? Lets first take a look at AAPL Volatility in the chart below (from iVolatility.com).

 

In the previous earnings report in July, shown in this chart, AAPL Volatility topped out at 36%. This was right before the earnings report. Today, with 2 weeks left to go, AAPL volatility has already touched this level. If you look at the earnings report in April 6 months ago, AAPL volatility topped out at 46%. Given the different conditions today with AAPL – Tim Cook’s missteps, the Maps fiasco, FoxConn issues and the “purple haze” on IPhone 5, its no surprise that AAPL volatility is spiking. And in the next 15 days, I would not be surprised if AAPL volatility spikes to 50, a 14-point jump.

 

If you think this is likely, then a great trade right now is a November AAPL straddle. The Option chain is shown below. The Nov straddle at the 645 strike price is going for about $59. If you buy this straddle, YOU MUST EXIT YOUR POSITION BEFORE THE EARNINGS EVENT.

 

 

 

You ride the bump up in Volatility, and you won’t lose too much in Time decay because Nov expiry is still a month away. Granted, the Nov series may not see a big bump in Volatility because the Weekly series just after the release will see the highest. But because of supply and demand, investors will be driving up the Volatility in the Nov series as well. And AAPL’s stock is in play right now due to fundamental reasons explained above. So its possible that you could get some huge moves before the earnings report, which would play very well for the Straddle.

 

You must exit your position before the report, because you’re likely to see a Volatility Crush right after the event, and will drain your Straddle of its premium. Ideal day to close this trade would be on Oct 25th during market hours.

 

4 Comments

  • Anil

    Reply Reply November 23, 2012

    Excellent comments here!Schwab alowls commission-free trades on its house-brand ETFs through your account. They have two ETFs useful for the Stock component of the Permanent Portfolio:Schwab US Broad Market ETF = SCHB (OER = .06%)Schwab International Equity ETF = SCHF (OER = .13%)TD Ameritrade has just announced a program that provides for no-commissions on 100 or so ETFs sponsored by iShares, Vanguard, Ssga, Invesco PowerShares and iPath.

  • Hari Swaminathan

    Reply Reply November 25, 2012

    Anil, would request you to keep comments on the topic – thank you..

  • louis

    Reply Reply December 5, 2012

    Did you put a straddle on apple

    • Hari Swaminathan

      Reply Reply December 6, 2012

      I did Louis. This was 2 months ago, I wasn’t tracking every trade at that time.

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