Apple Options All 'Skewed Up': Watch Out For High Call Premiums

Mar.19.12 | About: Apple Inc. (AAPL)

Recent trading has really "skewed up" Apple (NASDAQ:AAPL) options lately. You may have noticed that implied volatility has gone up as the stock logged about a 50% gain year to date. Even with those gains, options are getting remarkably expensive.

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That sharp drop off in implied volatility in late January came just after the company's most recent earnings announcement. But after that, IV measured for options that expire in 30 days has doubled -- and longer dated contracts are also higher. But the real story is in the skew we now see in the options.

Skew: Which should be more expensive -- puts or calls?

For options that have strike prices near where the stock is trading, puts and calls will be similarly priced. For some stocks, at-the-money puts can be a lot more expensive than calls, but only when shorting a stock carries an excessive fee (such as a large dividend or a stock with high hard=to-borrow fees). Otherwise, put/call parity tends to keep at-the-money puts and calls in line.

For example, as of March 16 an April 525 put would have cost you about $6.40, but a 645 call would have set you back $9.95. Both are about 10% out of the money. However, back on February 17, a 10% out of the money call would have cost about $3.40 vs. a 10% out of the money put at about $2.88. Both in dollar terms and percentage terms, calls now cost a lot more than puts.

It's important to note that all AAPL options have gotten more expensive with the 30-day ATM straddle costing about $56 now as opposed to $35 a month ago. While OTM calls are now way more expensive than puts, that's not usually the case. In fact, quite the opposite. The puts usually cost more than calls. To see this, take a look at the mean indexed implied volatility for 10% OTM calls and puts that expire in 30 days. This chart goes back more than a year.

The top chart shows the implied volatility. The bottom chart shows the difference between the two, or the premium of the puts over the calls. That's gone negative now.

Longer-dated options are generally less sensitive to day-to-day stock fluctuations, but even these options exhibit more skew toward calls. Here's a look at options that are 10% out of the money expiring in both 90 days and 180 days.

For options that expire in 180 days (I know, it seems like an eternity), puts are still more expensive than calls, but the premium for the puts is near one-year lows.

The "Volatility Surface"

You could go nuts generating 2D plots showing the difference in IV for all expirations and all strike prices. So a 3D chart plotting two axes (one for time and one for strike) helps provide a quick look at what's going on. Such a chart is called a "volatility surface" because adds a third dimension to the chart.

Usually, you'll see a volatility surface chart showing the implied volatility itself, but I'm showing it in terms of the premium of puts to calls. For example, here's such a surface chart for Apple options on February 17.

The x-axis shows the distance between the stock and the strike price. The y-axis shows the number of days to expiration. The z-axis shows the percentage premium of puts to calls in implied volatility terms. Note that for way out of the money options, puts were trading at a substantial premium to calls in percentage terms -- and that this premium tended to hold for options with a longer time to expiration.

Now here's the same chart for March 16:

This surface has become quite distorted. Even the way out of the money puts aren't nearly so expensive compared to calls. For out of the money options with a longer time to expiration, puts are still expensive, but for the rest of the options chain, the surface has been mushed down into the "floor" of the chart.

I realize this is pretty obscure, but the main takeaway is that if you're going to be buying OTM calls, you might see a move in the stock but not much of a movement in the price of your option. If you're buying OTM puts, while they are certainly cheap relative to calls, IV is high overall, so they might not perform as you expect either.

Disclosure: I am long AAPL.