Tuesday, September 8, 2015

AAPL Analysis

Update 9/22/2015: I exited AAPL as my profit exceeded half of its maximum potential.

Shares rose by 1.1% over 14 days, or a +28% annual rate. The position produced a 136.5% yield on debit, for a +3,558% annual rate.

The consumer electronics company Apple Inc. (AAPL), headquartered in Cupertino, California, holds a product announcement on Wednesday at 1 p.m. New York time. Rumors leading up to the event said a new iPhone, IOS operating system upgrade and Apple TV would be rolled out, and possibly a new version of the iPad.

[AAPL in Wikipedia]

I shall use the OCT series of options, which trades for the last time 38 days hence, on Oct 16.


Click on chart to enlarge.
AAPL at 10:47 a.m. New York time, 180 days 4-hour bars
Implied volatility stands at 42.9%, which is 1.7 times the VIX, a measure of volatility of the S&P 500 index. AAPL’s volatility stands in the 53rd percentile of its most recent rise

Relative to recent history, AAPL's implied volatility is low.Normally, I require that volatility be in the 70th percentile or higher. Al alternate measure used by some traders is the Implied Volatility Rank, a measure of the percentile within the 12-month high to low range. AAPL's IV rank is 53, and the generally accepted guideline for that measure is that a trade is OK if the rank is 50 or higher.

Ranges implied by options and the chart
WeekSD1 68.2%SD2 95%ChartEarns
Implied volatility 1 and 2 standard deviations; chart support and resistance, maximum earns move

The Trade

Iron condor, short the $120 calls and long the $130 calls,
short the $90 puts and long the $80 puts,
sold for a credit and expiring Oct. 17.
Probability of expiring out-of-the-money


The premium is $2.01, which is one fifth of the width of the position’s wings.The stock at the time of purchase was priced at $111.67.

The risk/reward ratio is 4:1.

The zone of profit in the proposed trade covers a $15 move either way, or four times the average true range.

Decision for My Account

I've skewed the profit range on this proposed trade to the downside, in part because of the downward skew of the chart range and in part because the markets, including AAPL, have been net bearish since mid-August in a fairly spectacular way.

Even so, both sides of the iron condor have excellent odds of expiring profitably.

In building this trade I was conservative in setting the width of the wings. The normal guildline is to make the wings one third the width of the premium, and I've gone for one fifth.

The risk/reward ratio is high, at the edge of what I find acceptable, in part because the $5 strike-price interval costs me the ability to build a nuanced trade.

I'm not to terribly concerned about the low implied volatility percentile. Many stocks produced extremely high IVs during the China Panic. If I remove that peak as an outlier, then AAPL's IV is near or at the 100th percentile.

I have opened a posItion in AAPL as described above.

-- Tim Bovee, Portland, Oregon, Sept. 8, 2015


My volatility trading rules can be read here.


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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.

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