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Option Plays Ahead of Apple’s iPhone 5

Here are strategies for both bulls and bears on AAPL's next move


One day remains until Apple’s (NASDAQ:AAPL) much-anticipated release of the iPhone 5. Rather than speculate on what types of new gadgets and gizmos are in store for techies across the globe, let’s take a look at the recent action in Apple’s stock and options.

As the first chart shows, AAPL remains in an uptrend with an uninterrupted series of higher highs and higher lows, along with a rising 20-day moving average.

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What should concern the bulls, however, is the momentum divergence brewing beneath the surface. The last two higher-swing highs in the price have been accompanied by lower-swing highs in the RSI indicator. With momentum waning, the uptrend in AAPL could very well transition into a sideways range or perhaps even a correction of sorts.

On the options front, implied volatility (gold line in next chart) has lifted steadily over the past month from 20% to 30%. On a percentage basis, the increase is obviously substantial, but keep in mind it started from very low levels.

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With 20-day historical volatility (blue line in chart) still sitting at 21%, implied volatility is trading at about a 9-point premium, which is about average. Throw it all together, and I’d say options are modestly overpriced here.

Given the strong tendency for implied volatility to rise into an event like tomorrow and fall afterwards, I’d lean toward being a seller of options.

In light of the slowing momentum and the overpriced options, traders willing to position themselves neutral to slightly bearish into the event could sell the Oct 720-730 bear call spread for $1.75 or better. The call spread would benefit greatly if AAPL followed the conventional “buy the rumor, sell the news” script by selling off after the event.

Traders inclined to position themselves bullishly into tomorrow could sell the Oct 610-600 bull put spread for $1.50. Consider it a bet that AAPL remains above $610 by October expiration.

At the time of this writing Tyler Craig had no positions on AAPL.

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