Monday, May 17, 2010

AAPL Options... A Steal or Too Rich?

Received a solid volatility question last week from Kevin. Let's take a stab at it:

My question is regarding ivolatility.com and understanding the chart and the figures in the table above the chart. If you look at AAPL, the implied volatility is around 36% and the historical vol is 39%. If you look at the 52 week high on historical vol in the table it shows on May 12th the high was 58.65%, but nowhere on the chart does this show up. One more question in looking at AAPL IV- if we take the range it's traded in, it looks to be just above the half way point so I would take that as IV being in the high category. Is this correct?


Thanks for the question Kevin. When speaking of historical volatility, keep in mind there is not one historical volatility reading. HV can be measured over any time frame. The table within ivolatility displays three different HV lengths: 10 day, 20 day, 30 day. The chart below the table only shows 30 day HV. The 52 week high of 58.65% that you mentioned in your question was that of 10 day HV, not 30 day. The 52 week high for 30 day HV is 39.7% which you'll notice is shown in the chart. I've done a couple previous write-ups discussing the nuances of historical volatility which will help shed insight on this part of your question. You can view them here: Part I, II, III, IV. Click image below to enlarge:

[Source: Ivolatility]

On to the second part of your question regarding whether AAPL IV is high or not. There's generally two ways of assessing volatility. One is comparing IV to its historical range (as you have done). In that respect, yeah AAPL IV is toward the upper end of its one year range and thus high relative to its historical norm. The second method you could use is comparing implied vol to historical vol. Currently IV = 41%, 30 HV = 40%, 20 HV = 48%, 10 HV = 56%. When compared to HV, rather than looking expensive, IV actually looks in-line to cheap. At the end of the day the only volatility that really matters is that realized by AAPL throughout the duration of your trade. If you were to buy vol via a straddle at 37% IV and AAPL continued to realize 48% volatility (current 20 HV), options are actually cheap. The only way AAPL options are expensive right now will be if AAPL settles down and HV drops. If AAPL continues to realize the type of volatility we've seen over the past 10, 20, and 30 days, AAPL options are in-line to cheap.

For related posts, readers can check out:
Implied Vol vs. Historical Vol
Relativity of Volatility
Finding Volatility

1 comment:

Investment research directory said...

Speaking of stocks under one dollar and five dollars. I bought shares in vonage holdings corporation for 37 cents and recently sold them for 5 dollars