AAPL is of course exceptional. It’s the largest stock in the world. But the exception I’m referring to is in its volatility pricing. Amazingly, its implied volatility has become unhinged from the rest of the market. Even for an exceptional stock, this is an exceptional case.
I started today’s post with the intention of showing how S&P 500 index volatility was behaving in a rare manner in the past few weeks. To demonstrate why AAPL is the exception, let me first start with why SPX volatility stood out to me.
Normally as an options trader, you operate with the expectation that implied volatility (explained in our education section) is likely going to be similar to recent historical volatility, barring special circumstances like upcoming earnings. Well, SPX implied volatility has been steadily ticking higher over the last few weeks, even though historical realized volatility has only moved up slightly. Though intraday volatility has felt high, the SPX index has only moved more than 2% once in the last 3 months (and that was Friday’s jobs report).
Here is the chart showing SPX 30 day historical realized volatility vs. 30 day implied volatility (the options price expectation for the next 30 days of volatility):
As you can see, historical realized volatility has been consistently below implied volatility all year, but the spread has gotten particularly large recently (to 8 vol points, near the lows of the last year). The main reason for this is that the market sees many large market-moving events ahead of us in the next month (Greek elections, FOMC, potential ECB and EU bank intervention, etc), so options traders are saying, even though the market might not be moving much now, we expect bigger market moves ahead of us.
At times, the market is right in pricing this, as the spread behaved similarly during the debt ceiling debate last July, which did eventually lead to much higher realized volatility (and the line surged to positive as realized volatility surpassed implied volatility). In other instances, like April and May of last year or Jan and Feb of this year, the market overprices future risk, and realized volatility stays low.
So why is AAPL the exception? Every other stock in the SPX top 20 (and the large majority in the whole market) has a similar implied vs. realized volatility chart to the one above. AAPL is the only stock in the top 20 that has the opposite situation, where 30 day realized volatility is higher than 30 day implied volatility:
AAPL realized volatility is still 5 points higher than implied volatility, and has been more than 10 points higher at times in the past 3 months. This chart suggests that AAPL options are still too cheap, especially relative to the rest of the stock market. I am surprised that this phenomenon has existed for as long as it has, as I brought up the idea of cheap AAPL option pricing almost 3 weeks ago in a separate CotD.
Given how large the difference is between the market’s spread and AAPL’s spread, I continue to maintain an option buying bias in AAPL, no matter your directional view.