Implied volatility stands at 27.9%, which is 2.3 times the VIX, a measure of volatility of the S&P 500 index. AAPL’s volatility stands in the 57th percentile of its most recent rise.
Given those numbers, I would construct the trade this way:
short the $111 puts and long the $107 puts,
sold for a credit and expiring Aug. 22.
Probability of expiring out-of-the-money
| AUG | Strike | OTM |
|---|---|---|
| Upper | 123 | 76.1% |
| Lower | 112 | 88.6% |
The premium is $0.69, which is 17% of the width of the position’s wings.The stock at the time of analysis was priced at $119.74.
The risk/reward ratio is 4.7:1.
The zone of profit in the proposed trade covers a $5.50 move either way. That is double the average true range.
However, the low implied volatility relative to the most recent rise makes AAPL less attractive as a trade. I'm passing on it and will give it no further consieration based on the Aug. 3 trading signal.
Update 8/4/2015: AAPL continued to trade lower on Tuesday, thus failing to confirm its low-odds break below the 20-day price channel.
In a low-odds channel breakout, confirmation occurs when the price returns to within the price channel.
AAPL's breakout level was $119.22, and at this writing the price is $114.36. If the price returns to $119.22 or above in the next few days, I'll revisit an AAPL trade. As of now, however, there is no trade because of non-confirmation.
The consumer electronics company Apple Inc. (AAPL), headquartered in Cupertino, California, broke below the 20-day price channel on Monday. AAPL has low historical odds of successful trading signals to the downside. It will confirm the bear signal if it pulls back within the 20-day price channel on Tuesday.
[AAPL in Wikipedia]
AAPL
I shall use the AUG monthly series of options, which trades for the last time 17 days hence, on Aug. 21.
Odds
AAPL has produced five bear signals in the past year, all of them unprofitable. On average each lost 51% over a 20-day lifespan. In short, AAPL is prone to bearish whipsaws. The low success rate -- zero -- suggests that a non-directional trade will have the greatest chance of success.
Click on chart to enlarge.
 |
| AAPL after 8/3/2015 close, 90 days 2-hour bars |
| Week | SD1 68.2% | SD2 95% | Chart | Earns |
|---|---|---|---|---|
| Upper | 126.26 | 134.08 | 132.97 | N/A |
| Lower | 110.62 | 102.80 | 117.52 | N/A |
| Gain/loss | 6.6% | 13.2% |
The Trade
There is no event pending to cause a sudden jump in AAPL's price in either direction, so my assumption must be that the greatest risk to a non-directional trade is a continued decline, in line with the present trend. Therefore, I have skewed the proposed position sharply to the downside
short the $105 puts and long the $100 puts,
sold for a credit and expiring Aug. 22.
Probability of expiring out-of-the-money
| AUG | Strike | OTM |
|---|---|---|
| Upper | 120 | 61.1% |
| Lower | 105 | 90.2% |
The premium is $1.47, which is 29% of the width of the position’s wings.The stock at the time of analysis was priced at $118.44.
The risk/reward ratio is 2.4:1.
The zone of profit in the proposed trade covers a $7.50 move either way. That is 3.1 times the average true range.
Decision for My Account
I intend to attempt to open a position in AAPL structured as described above. I'll update this analysis after the market open with the outcome of my attempt.
-- Tim Bovee, Fukuoka, Japan, Aug. 4, 2015
References
My volatility trading rules can be read here.
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Disclaimer
Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decisions for his or her own account, and take responsibility for the consequences.License
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Based on a work at www.timbovee.com.
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