With the market battling for support over the last few days, I decided this morning to take a look at the market’s leader, its renaissance king, the ever-controversial AAPL. Given AAPL’s persistent strength this year, and its 1%-plus contribution to the S&P 500’s performance, I was curious if its implied volatility was giving us any signs as to the psychology of the investor base and the market as a whole.
The following chart compares 10 day historical volatility (white line) vs. 30 day implied volatility (red line).
Not surprisingly, as AAPL made new highs from February to April with fresh headlines each morning, implied volatility moved steadily higher as many traders and investors reached for calls. Realized volatility, however, did not pick up until AAPL sold off in mid-April after its steady ascent, and then had a earnings gap move higher. Since that earnings gap, the stock has calmed down quite a bit, with realized volatility back in the lower end of its range for the last year. With both realized and implied volatility near their mid-points of the last year, AAPL volatility does not show any large anomalies.
But options pricing should always be considered in the broader market context. First, let’s review AAPL’s performance vs. the SPY so far this year:
When I see this chart, I view AAPL options that are priced for normal conditions (as we saw above in the 1 year chart) as quite cheap given the circumstances. A large portion of market gains by market participants this year are tied up in this one stock, so any further market weakness is likely going to see increased options buying to protect gains. And the stock with the most gains to protect? AAPL. If the market instead rallies from here, implied volatility will decline across the board. Yet, AAPL volatility is already priced for a normal market regime, so AAPL volatility has less room to fall.
Whatever your view on AAPL here, replacing long stock with calls or short stock with puts makes a lot of sense to me.