Apple’s (NASDAQ:AAPL) blowout quarter seemed to be the talk of the town during last week’s trading. With its 6% launch to new all-time highs, AAPL has once again proven its dominance in the technology space.
While the stock-centric among us might be dialed in to AAPL’s stock and earnings performance, option addicts are taking note of an interesting development in the implied volatility of AAPL options.
The typical behavior around earnings is a rise in volatility in anticipation of the event, followed by a quick drop after the earnings release. This cyclical rise and fall reflects the tendency for options to become expensive heading into earnings and to become cheap afterward.
What is surprising about AAPL this go-around is the magnitude of the post-earnings volatility crush. With 30-day implied volatility resting at 19%, it’s sitting at levels not seen in years (see graphic below). And it’s not just short-term levels of volatility that have been shellacked — 60-, 90-, and 120-day implied volatilities have also fallen to levels not seen in a long time.
Source: Livevol Pro
So, what’s the key takeaway? Options are relatively cheap, potentially making them a steal at current prices.
One strategy worth consideration for AAPL shareholders looking to reduce risk while maintaining bullish exposure is the stock replacement strategy.
To exploit the relative cheapness of options, AAPL owners could sell their stock and buy call options. This affords them continued bullish exposure in the event AAPL rises while drastically reducing the amount of capital allocated to the position. The expiration month and strike price selected depends on the desired duration and level of exposure.
Suppose you were looking for continued exposure over the next quarter. You might consider selling your AAPL stock and replacing it by buying an AAPL April 435 Call option, currently trading in the $27 area.
If you don’t already own the shares, this call could also be a way to initiate a position. Either way, if the stock remains above $435 by April options expiration, you as the option buyer can choose to exercise the right it gives you to purchase shares at the $435 strike price.
At the time of this writing Tyler Craig had no positions on AAPL.
