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Apple (AAPL) option implied volatilities will likely get crushed tomorrow

|Includes: Apple Inc. (AAPL)

Technology bellwether giant Apple (NASDAQ:AAPL) reported earnings after the close tonight.  The report showed strong revenue and earnings growth.  iPod sales are on the decline and iPhone sales may have come in a bit shy of the higher forecasts.  However, Mac sales were strong, the company continues to have very high gross profit margins, and has accumulated a large warchest of cash.  In the very near future, AAPL is expected to unveil a new "Tablet" product that has many consumers and industry watchers very excited.

The stock is trading slightly higher in the after-hours tonight, after ganing during the normal trading day.  Assuming we open flat/higher tomorrow, look for a big "implosion" in AAPL option implied volatilities tomorrow:



You can see in the above chart from livevolpro that after the previous earnings report in October 2009, the implied volatility on AAPL option (red line at bottom) "came in" to meet close to the historical volatility of the stock itself (grey line).  We are set up for a similar decline in AAPL option premium tomorrow, with the implied vols likely to drop from the low 40s to the low 30s.

This is why buying premium ahead of an earnings report or big news event can be a risk for a novice option trader.  The market has often "priced in" the odds of the event causing a large move, and the Market Makers are often "short" many Calls & Puts ahead of the news .... so therefore they are often incentivized to lower the option prices so that they can buy them back for a cheaper implied volatility, locking up profits.

Disclosure: No positions.