Thursday, July 22, 2010

Vol Sellers Delight

Now that the dust has settled on AAPL earnings, let's take a look at how things have shaken out. Though market participants have a variety of expectations going into earnings, volatility traders fall into one of two camps. Those positioning themselves for a larger move than what the option board is pricing in and those looking for a smaller move. Call it the tale of two vol traders. Those long vol would love to see AAPL either pop or drop huge following the announcement. Those short vol prefer to see the announcement turn into a non-event lacking any type of fireworks.
[Source: Livevol Pro]

The latter scenario turned out to be the case this go around as AAPL's up gap got sold into with a vengeance. Matter of fact, by the end of the day AAPL had closed less than 1% higher than its pre-earnings close. Couple the tiny move with the 10 pt. drop in implied volatility and you've got an environment quite favorable to vol sellers. So it comes as no surprise that the iron condor mentioned in The Big AAPL came out a winner. I'd venture to say virtually any short vol play would have worked.

Here's an updated look at the condor's risk graph showing just under half of the profits already accumulated.
[Source: MachTrader]

1 comment:

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