Want to win a free Ipad? All options trading investors have to do is guess
where Apple (NASDAQ: AAPL ) will move tonight after earnings. And oh yeah, you
have to design a trade that will make you enough money to buy one. What does Mr.
Market expect? Well, heres a look at 30-day Implied Volatility in AAPL
(basically the May option volatility) vs. 20-day realized volatility in AAPL
itself. Apple (NASDAQ: AAPL) To the naked eye, options look considerably
overpriced. They carry a 30-ish volatility, while AAPL itself chugs along at a
high teens volatility. But of course they price in a possible earnings gap. And
whatever AAPL does tonight, we know that implied volatility will implode. How
far? Well, thats the $799 question. AAPL implied volatility hit a low of about
20 back in February. I would think thats pretty much a floor now as AAPL itself
is perking up a bit lately. So lets say IV in AAPL declines to 22 after the
earnings. We can then take volatility estimate and apply it to AAPL May options
going forward and determine how far AAPL would have to move to tonight to
essentially offset the volatility decline. I personally just plug in delta
neutral strangles and see where I break even when I move the implied volatility
to where I expect it to go. And in AAPL, that tells me the market expects maybe
a 6% 7% move tonight. Now big caveat. I did this exercise before trading
started today. So it's possible options volatility moves a few points between
now and the bell. If volatility lifts, that obviously suggests the market
expects a larger move than the 6% 7% I came up with. Todays gap also highlights
the danger of looking at earnings expectations too soon. You have to remember
the stock will move on its own before the number. Follow Adam Warner on Twitter
@agwarner .
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