AAPL - Earnings Strategy Scalps Vol and Delta Patterns 8 Straight Quarters

Discussion in 'Options' started by livevol_ophir, Jul 20, 2010.

  1. livevol_ophir

    livevol_ophir ET Sponsor

    AAPL is trading $246.15 with earnings today AMC.

    <img src="http://3.bp.blogspot.com/_hMry1m7UF10/TEXD_e6u8_I/AAAAAAAADoI/tDDZ7nsa4o4/s1600/aapl_summary_2.gif">

    For the last eight earnings cycles AAPL has followed a consistent pattern. Namely, the stock has gone up from close to close each time. The stock stats by earnings cycle are included (<a href="http://livevol.blogspot.com/2010/07/aapl.html">in the article)</a>.

    <img src="http://3.bp.blogspot.com/_hMry1m7UF10/TEXKifxewqI/AAAAAAAADo4/l1Uvc54w-fI/s1600/aapl_stock_earnings_stats.gif">

    The upward move in stock price has sometimes been so great that it made the front month ATM straddle a purchase ahead of earnings for the one day trade; at other times, the move up has been smaller and the ATM straddle was a sale for a one day gain.

    One pattern that has worked eight quarters in a row has been to sell the straddle one strike above ATM on the day of earnings and then to buy it back the day after. This takes advantage of the stock move up AND the vol move down. The stats for this trade are included (<a href="http://livevol.blogspot.com/2010/07/aapl.html">in the article)</a>).

    We can see an average 20.9% one day gain with a range of [14%, 28%]; i.e. not that volatile. This 20.9% return is relative to the 4.5% from just holding stock AND allows for downside moves as well.

    The Options Tab (in the article) as of ~11:30 EST for AAPL is included (click to enlarge).

    We can see the straddle one higher than the ATM is Aug 250 as of right now (may change before the day is over). The Aug 250 straddle is worth ~$24.25 to a seller slightly worse than mid market. The weekly options now add another twist. Since AAPL earnings are today AMC, the results will filter into the option prices tomorrow. That makes the weeklies essentially all earnings vol (as they expire on Friday AMC).

    The July (W) 250 straddle is worth ~$15.60. Since these options expire so soon, we can actually put a PnL range to expo for them. Specifically, this trade wins if AAPL is in ($234.40,$265.60) by Friday close.

    The Skew Tab snap (<a href="http://livevol.blogspot.com/2010/07/aapl.html">in the article)</a>) illustrates the vols by strike by month and does a wonderful job of exhibiting the pure earnings vol in July.

    We can see how high that red line is relative to every other month. The Weeklies present a riskier trade since the straddle sale receives so much less relative to Aug - that means, much less room to be wrong. However, it also offers the possibility of a massive win, as once earnings go, the options will drop to just a bit over parity pretty quickly.

    Very interesting... just to be really, clear, this is a very risky play, (either straddle sale) regardless of the past theoretical success. AAPL can move $50+ in a day on earnings if the news is big enough.

    This is trade analysis, not a recommendation.

    Details, trades, prices, vols, skews, charts here:
  2. aapl always goes up after earnings
  3. It's Tuesday, today.
  4. livevol_ophir

    livevol_ophir ET Sponsor

    right, earnings out today AMC --> options Adjust Wed; that leaves a three day option making the options mostly parity for th/fr (with some wiggle).
  5. livevol_ophir

    livevol_ophir ET Sponsor

    It looks like the 260 straddle is going to be the one > ATM as AAPL looks like it might close above $250.
  6. livevol_ophir

    livevol_ophir ET Sponsor

  7. Ok ...... I had a quick look at your post and I thought you were buying.

  8. livevol_ophir

    livevol_ophir ET Sponsor

    I gotcha...
  9. What if there is a gap down? If there is a reasonable chance for appl to dump, this might be one. The main thing that saves it is a green close in market today.

    How about selling a time spread?
    #10     Jul 20, 2010