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Apple Options a Buy but They Aren’t Cheap

Prices remain high despite a decline in volatility


Tough to find many bargains at the Apple Store. Or in Apple stock for that matter. But maybe option trading investors can find some bargains in the Apple (NASDAQ: AAPL) options?

Here’s a look at AAPL volatility over the past 6 months. The yellow line represents 30 day implied volatility in the options, and the blue line 20 day realized volatility in the stock itself.

Apple Volatility

Apple Option Volatility

And as you can see, options volatility has actually dipped below historical volatility for the first time in the past half year. What’s more, options themselves sit at a 52-week low in volatility terms. On the surface, they do feel like good buys. I’m not sure I’d go in as a pure volatility buyer and go long straddles and/or strangles, but I can see using the cheap options to your benefit.

No secret the stock has made a nice run here. If you were lucky enough to own some, certainly not a bad time to replace a stock long with a call long and cap any downside. Of course that could have tax implications, so alternatively, you could just buy puts against the stock long and accomplish exactly the same thing.

Options of course are not just for bears. You could just walk in from scratch and buy calls at the cheaper prices. The risk is that options aren’t necessarily cheap, even at these seemingly bargain prices.

Remember always that implied volatility and historical volatility are related, but wildly different beasts. Historical volatility looks backwards, in this case 20 days. And as you can see, historical volatility in AAPL can move around quite a bit. It tends to hover in the low 20’s, but as recently as a month ago, it hit a low of about 8. That was near the holidays, and a bit misleading, but it does highlight the potential downside of owning cheap paper if you happen to time it into the one of these dull stretches.

And right here right now, there’s not an enormous amount of uncertainty in AAPL. Earnings are behind us, Jobs is (sadly) out, and the Verizon IPhone launch and imminent tablet competition are reflected in the stock price. I do believe options are a net buy here now, I just wouldn’t back up the truck quite yet.

Follow Adam Warner on Twitter @agwarner.

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