Name That Trade $AAPL – Considering Fruit Flies

by Enis February 26, 2014 2:12 pm • Commentary

Dan posted his thoughts on AAPL’s technicals in last week’s CotD post, concluding:

At this point, AAPL seems comfortably stuck between the $500 and $550 technical support and resistance levels.  Unfortunately, options premium is not expensive enough in our view to actually play for more range-bound price action.  Here is 30 day implied volatility in AAPL over the last year:

30 day implied volatility in AAPL, Courtesy of Bloomberg

30 day implied volatility in AAPL, Courtesy of Bloomberg

Near its 1 year low.

Buybacks naturally depress volatility, and that’s what has happened to AAPL ever since Mr. Icahn got vocal.   However, the risk/reward is not sufficient to play for continued low volatility going forward, so we might simply look for another buy the dip opportunity if the stock gets near the lower end of the range, around $500.

AAPL is down for the 5th day out of 6 today.  The stock is approaching its gap from February 6th, when it closed around $512.50.  Moreover, the $500 level is obvious, important longer-term support for AAPL going forward.  

Since 30 day implied volatility has not moved higher in the past week, even with the stock’s weakness, the range-bound call butterfly structure that we normally like to employ for AAPL doesn’t look as attractive as usual.  For example, the Apr19th 500/530/560 call fly costs about $8.25.  For those more bullish, bumping up the structure by about $10 doesn’t make a big difference in premium outlay.  The Apr19th 510/540/570 call fly costs about $7.50.

Moreover, the potential gain over the next month for a butterfly that does not expire until April is not significant.  The Mar22nd 500/530/560 call fly is worth about $11.50, which is a good indication of where the April butterfly might be one month from now if implied volatility stays in the same spot.  In other words, if the stock does not move, then the call butterfly would be about a 40% winner a month from today.

This tepid gains for taking on new risk in a call butterfly structure are a result of the low implied volatility that Dan laid out last week.  If AAPL 30 day implied vol moves back to near the 25 level in the coming weeks, then we might get more interested in executing a range-bound structure like the ones mentioned above.  For now, even though our range-bound view holds, we don’t see a great trade to take advantage of that view.