AAPL Vol & Skew Update Number #2

Discussion in 'Trading' started by livevol_ophir, Jan 27, 2010.

  1. livevol_ophir

    livevol_ophir ET Sponsor

    Pre-earnings Vol Blog:<b> <a href="http://livevol.blogspot.com/2010/01/aapl.html">HERE</a></b>

    Post-earnings Vol Blog:<b> <a href="http://livevol.blogspot.com/2010/01/aapl-update.html">HERE</a></b>

    The news is out on the iPad and its pricing; the news is out on earnings as well. I have included the skew pre-earnings (with market dipping), post earnings and now after the iPad news. I find this progression an interesting study in the movement of the months relative to each other and the skew shape with impending news; I hope you do too. Click any image to enlarge it; note the movement of the front month(s) (red and yellow).

    <b>Skew legend:</b>
    Red - Front Month
    Yellow - Second Month
    Green - Third Month
    Light Blue - Fourth Month

    Charts, details here:
  2. Thanks for sharing. I'm curious. Have you done any type of detailed research or can you point to studies or white papers, showing abnormal front month IV skew has strong correlation or predictability of direction up to exp date (or short periods within)?

    Is it correct to say that is the general hypothesis you are asserting on your blog?

    It seems just from looking at the two skew plots you posted that it would only be beneficial in the very short run? As opinions changed one day to the next.

    I guess I am also asking, what strategies are you suggesting to benefit off of this information?


    P.S. It would be nice to be able to freeze the animation at various panes.
  3. livevol_ophir

    livevol_ophir ET Sponsor

    No hypothesis intended. As a volatility event approaches (earnings, news, etc) the month it occurs in naturally rises higher than others. It's simple math really - here's a contrived but illustrative example.

    Say a stock has normal vol of 20 on a standard day. Say a vol event (FDA decision for a drug or earnings, or whatever) has a vol level of 150.

    Say there are 10 days to front expo and the vol event is in five days. Then the front month vol will be an average of:

    Front: 20, 20, 20, 20, <b>150</b>, 20, 20, 20 ,20 20

    Second: Front + 20, 20, 20, 20, ..... for 22 days.

    Third: Front + Second + 20, 20, 20....

    So they vol event is "diluted" less in the closest month.

    Technical detail: Note the term average is used loosely here as you cannot average standard deviations - you must square , then average then square root.
  4. Right.

    But how does that knowledge benefit one, other than superfluous information? For example, I might interpret the first chart you posted as a quick scalp to buy pre-earnings, yet the results weren't too great at all
    (news was great, price performance lackluster).

    I.e. other than pointing out an abnormality and an intuitive interpretation, is there any benefit to having that knowledge (tested) other than guessing without it? I'm sure there are some options gurus on the board that have investigated this phenomenon?

    I've been meaning to do more studies on IV, but find the lack of historical options chains information challenging.
  5. livevol_ophir

    livevol_ophir ET Sponsor

    I can't provide trade advice or anything even close to it as I am a MM on the exchange floor. Perhaps one way to think of it, without getting technical, is - sell high / buy low...

    Not meant to be stupid - think about it... There are some traders here that do just that when the opportunity is right.

    When is the opportunity right?... Remember trades and behavior and make use of that memory... Is this how AAPL normally reacts? Was vol higher this time than others? It was (that's a free-bee). Why was it? Hint: First blog...
  6. Ok, that's understandable. Was just curious on seeing some more detailed studies or personal research to corroborate the intuitively obvious implications. Thanks for sharing your thoughts.
  7. livevol_ophir

    livevol_ophir ET Sponsor

    No problem...

    A little marketing now...

    Livevol Pro has an Earnings & Dividends Tab which tracks the vol and prices for the front two month ATM straddles starting 5 trading days before and ending 5 trading days after earnings.

    You can see:

    (1) If you want to scalp vega (delta neutral) and purchase vol 5 trading days before earnings and sell right before - how much vol can you expect to scalp.

    (2) Should you back spread or front spread a certain issue into earnings based on the past.