Wednesday, December 5, 2012

Apple (AAPL) - Have We Moved into a Totally New Volatility Paradigm for This Company? Has Everything Changed?

AAPL is trading $549.06, down 4.6% with IV30™ up 15.5%. The LIVEVOL® Pro Summary is below.


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Apple Inc. (Apple), along with its subsidiaries, is engaged in designing, manufacturing and marketing mobile communication and media devices, personal computers, and portable digital music players.

This is a vol and stock note on the largest company in the world. I see a potential paradigm shift in the way the option market reflects risk in APPL -- and the shift is not trivial.  I'll even call on your knowledge of Econ 101 from your college days.  But first, let's start with some news from today:

(AAPL) shares fell more than four percent following news that margin requirements are being raised to 60 percent from 30 percent by COR Clearing.

The tech giant is down more than 20 percent from its record high of $705 in September and is trading back in bear market territory.

Source: CNBC via Yahoo! Finance; Apple Stock Plunges on Higher Margin Rules.

There is also some technical stuff in the article (i.e. technical analysis on the charts), for those interested.

Let's turn to the Charts Tab (six months), below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

In terms of a six-month return the stock has gone from $562.83 (6-5-2012) to now just under $550 for a modest 2.4% decline. Of course, the focus has been over the last 2.5 months -- AAPL hit an all-time high of $705.07 on 9-21-2012 and since then (as of this writing) is down over 22%. Note the free-fall from the all-time high to the low on 11-15-2012. The 52 wk range in APPL is [374.36, $705.07].

On the vol side, we can see recent rise in the implied. For a clearer look at the IV30™, I have included a six-month implied chart in isolation, below.

I've highlighted the recent run up as well as the most recent high on 10-19-2012. The 52 wk range in IV30™ for AAPL is [18.18%, 45.81%], putting the current level in the 66th percentile.

But, here's what really caught my eye. The most recent closing low in stock price was on 11-15-2012 when AAPL closed at $525.62. At that time, the IV30™ was rising and hit 32.55%. Shortly thereafter, we can see the stock rise again, only to now start another downward trend. But, with the stock $20 lower then than it is today and in what for all intents and purposes was an absolute free fall from an all-time high (see the chart again), the implied only hit 32.55% on 11-15-2012.

But now, with the stock having already reversed the straight down move from the all-time high, and now headed on a new downward trajectory (after a small recovery), the vol has expanded (increased) significantly more to over 36%. So we see a $20 higher stock price now, with a free fall having ended, yet the implied is now higher than it was during the free fall. In English, the risk reflected by the option market has shifted -- it's higher.

Vol can behave much like demand (in fact, vol is demand for protection (puts) or speculation (calls)), where there can be an increase in quantity demanded (that's moving on the same demand curve to the right) and an increase in demand (which is a totally new demand curve drawn above the prior one). I've included a contrived picture of some "widget" demonstrating the difference in an increase in quantity demanded (moving from one red dot to the other) and an increase in demand (moving from blue Demand curve D to red Demand curve D'), below.

IMHO, AAPL is seeing a new demand curve (i.e. vol) -- we're no longer moving on the same vol curve and have moved to a new (higher) one. Like the difference between an increase in quantity demanded and an increase in demand, AAPL is showing a brand new risk curve -- a new paradigm if you will -- and it reflects higher risk.

This will be an interesting one to watch. If the hypothesis is correct, AAPL will be at elevated vol levels relative to the past in all situations (going up, standing still and going down). Those situations could (should) include earnings.

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1 comment:

  1. ANY comment on how steep the put/call smile is now versus history?