http://www.tylerstrading.com/aapl-volatility-sale/
Just as the pre-earnings bid-up bonanza often leads to unjustifiably high premiums, the post-earnings volatility implosion sometimes leads to basement bargains. As is the case with virtually any market gauge driven by human forces, it can often overshoot at both ends. Excessive demand can lead to expectations for too much volatility while excessive supply can lead to expectations for too little. These occasional forays to the extremes act as signals to the option opportunist.
With the AAPL earnings blowout now in the rear view mirror we’ve seen a quick about face in implied volatility as its swiftly moved from a three month high back down toward yearly lows. As shown in the vol chart below, the implied vol has dropped to 22% which is fast approaching the 52 week low of 20%. The recent plunge has also brought IV beneath the 30 day historical vol, a feat which has only been accomplished two other times over the past year.
[Source: Livevol Pro]
Any way you slice it, volatility is starting to look cheap.
Strategies like stock replacements, long calls & puts, and long straddles become increasingly enticing in an environment such as this. The cheapness of volatility is easily seen by assessing the value of the front month straddle. At the time of this writing the Aug 390 straddle was trading around $19.50. Given that the Average True Range is sitting at $8, the straddle is only pricing in a two and a half ATR move over the next four weeks.
For related posts, readers can check out:
Strike While the Iron Is Hot
Earnings and the Volatility Pendulum
The Cycle of Implied Volatility
