On Wednesday I outlined a strategy for dealing with the Apple (AAPL) earnings announcement scheduled for after the market close on Thursday - An Options Play for the Apple Earnings Announcement
Today I would like to discuss closing out those positions and checking out how our assumptions held up, particularly on what changes there were in Implied Volatility (IV) of the November and December AAPL options following the announcement.
These are the seven spreads that I suggested buying prior to the announcement at a time when AAPL was trading about $615 (click to enlarge):
These seven trades cost $5402 to place plus $17.50 in commissions (what I pay at thinkorswim by TD Ameritrade) for a total of $5420.
As I write this, AAPL has dropped to $608 from the $615 where it was when I placed the trades on Wednesday. Here is what the spreads could be sold for at this time (click to enlarge):
The spreads could be closed out at this time for $6520 after commissions. At these prices, there would be $900 gain after commissions.
This was a disappointing result even though you never go broke taking a profit. Since there has been a pattern of weakness for the stock on Fridays (most likely due, to my way of thinking) to people writing Weekly calls on their stock on that day. When a lot of calls are sold, market makers are the buyers for the most part, and they need to sell stock to balance out their risk. This selling causes the stock to move lower.
On Monday, the call-selling is pretty much over, and Apple bulls often buy calls on that day, and the stock usually moves higher on Monday. (Remember that a week ago, the stock fell $23 on Friday and rose $24 on Monday?)
Rather than closing out the calendar spreads (except the 605 put spread which is in the money and needs to be closed out now), another more risky but potentially big winning tactic would be to let the Oct4-12 options expire worthless and wait until Monday or Tuesday to close out the long November positions.
So what did IV do after the announcement? Going in to it, the November options had an IV of about 40 which was well below the 74 number for the Oct4-12 Weekly series. (This big IV advantage was what encouraged us to make the trades in the first place).
The December options had an IV of 36 and we guessed that the November IV would fall to that number after earnings. We were wrong. Both months fell to 32. That caused the projected gains from the calendar spreads to be much less than risk profile graph showed on Wednesday. With the stock at $608, the graph showed that the gain should be close to $4000.
The difference between the indicated $4000 gain and the $900 gain that actually resulted came about because IV for the November options fell to 32 from the 36 number that the graphing software assumed would be the right one.
This experience shows how vitally important IV is to the final results of calendar spreads. In future pre-announcement times, we should anticipate a larger fall in the next-month IVs and discount the numbers indicated on the risk profile graph.
Most learning experiences cost money. This one was better - we learned something important and made a little money at the same time.
Disclosure: I am long AAPL.