Apple (AAPL) has this annoying habit of scheduling earnings releases just after a monthly option expiration.
The next earnings release is in late January, so traders interested in taking a position based on this event will have to consider February options. But traders who want to take advantage of rising implied volatility in the options overall could consider January options, even though they'll expire before AAPL releases its numbers.
For AAPL, like many stocks, you’ll often see implied volatilities rise into the earnings announcement, then fall after the news is out.
Apple has followed this pattern many times in the past, but the overall volatility environment today is, well ,volatile. We usually see implied volatilities fall near the holidays, but with everything that’s going on with Europe, I’m not sure that pattern will repeat this year.
Anyway, back to Apple. Here’s a chart showing 30-day and 60-day mean indexed implied volatility along with the green arrows showing earnings announcements.
In most cases, the rising volatility pattern holds. Can we count on Apple options to get more expensive this time around? I decided to take a more detailed look at IV levels just before the last six earnings releases. Once again the green arrows show the earnings release date:
So that brings us to this next earnings release – and here’s where we stand so far for this next earnings cycle:
Will the implied volatility dip later this month? I think it will. If so, it would be a good opportunity to take a position. I’m long AAPL so I’d consider buying a bit of extra put protection. I’m confident in the company’s long-term performance potential, but I’m NOT confident about what the market’s knee-jerk reaction will be regardless of what the earnings looks like.
But if you want to make money simply on a rise in implied volatility, I don’t think this is the best place to take a position. If IV falls to the 25% area in the next couple of weeks, I would consider a trade to take advantage of a potential volatility spike. If it doesn’t, well then I missed my opportunity this quarter.
The problem with trading volatility
All other things being equal, a hike in IV causes option prices to rise. But “all other things” are rarely equal.
For one thing, IV tends to be higher for longer-term options. Note from the charts above that the 60-day options usually carry a higher premium than the ones that expire in 30 days. And 60-day options have this nasty habit of quickly becoming 30-day options – something we can’t change unless we find a way to warp spacetime and slow down time decay.
Another issue is that while implied volatility may rise, the specific options you buy or sell may not rise along with it. The reason? Implied volatility has the most impact on the at-the-money options. If the stock rises or falls, IV is less of a factor in your position.
Let’s say that with Apple at 380, you buy a 380 call. If IV rises and AAPL stays near 380, your option should grow more valuable.
But let’s say AAPL falls to 360. Well that spike in IV will help a little, but you now own an OTM call that will be worth a lot less than you paid for it regardless of volatility.
On the other hand, AAPL could rise to 400. If so, your call option will be worth a lot more. But does volatility have anything to do with it? Not much. In fact IV will likely be lower if the stock rises. You’ll make money on the trade, but it will be thanks to rising the delta and gamma of your option – not rising implied volatility.
I happen to think AAPL options will get a bit cheaper as the end of the year nears and then we’ll see a rise into mid-January. I’m basing this more on gut feeling than anything else, so take that for what it’s worth.
Disclosure: I am long AAPL.