Well, folks, it looks like volatility is dead and buried in Apple (AAPL) land.
The momentum star of yore has been lulled to sleep like a toddler in preschool after a milk break. Of course, at some point it’s bound to wake up and stage a large move in either direction.
See, that’s the thing with volatility — it alternates between periods of compression and expansion with one eventually giving rise to the other. With Apple having traded in a fairly narrow range around $430 for more than a month now, I suspect a volatility resurgence will come sooner than later.
Let’s take a closer look at some popular volatility metrics to see just how inert Apple has become. The first chart displays AAPL along with the Bollinger bands indicator. Notice the tightening of the bands over the past month. The bottom panel measures the width of the Bollinger bands, which has fallen to its lowest levels not only of the past six months, but also of the past couple years.
The next chart displays 20-day historical volatility of AAPL in the bottom panel. Given its utter lack of movement of late, the 20-day HV has fallen to a paltry 13% — its lowest level in years.
Not surprisingly, this drop in realized volatility is driving down the price of option premiums. With the stock exhibiting the pulse of a corpse, few traders are willing to pay high prices for option contracts.
To see just how cheap options have become, we can view the CBOE APPLE VIX (VXAPL). As shown below, the VXAPL has fallen to its lowest levels of the year at 25%. Although the volatility index has gone even lower a few times in the past, it usually doesn’t remain this low for very long. Eventually, anticipation of the next earnings announcement kicks in and drags implied volatility higher. And with AAPL reporting its next quarterly earnings in July, it’s a good bet VXAPL might be close to a low point.
Traders looking to exploit the potentially cheap options in AAPL have a few different strategies worth consideration.
If you have a directional bias, you could simply buy a July call or put option. The cheaper price tag means you have less at risk if you’re wrong. If you’re looking for more of a pure play on volatility, consider entering a July straddle by buying the 430 call and 430 put simultaneously for $22.80. Consider it a bet that AAPL will rise or fall more than $22.80 by July expiration. Plus, if implied volatility starts to rise from the abyss, the straddle will benefit.
As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.