Monday, December 10, 2012

AAPL - Everything has Changed. The Old AAPL is No More. The New AAPL is a Riskier Entity and the Market Doesn't Know What that Means Yet.

AAPL is trading $528.42, down 0.9% with IV30™ up 1.2%. 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 follow up piece to the post on 12-5-2012, entitled:
Apple (AAPL) - Have We Moved into a Totally New Volatility Paradigm for This Company? Has Everything Changed?

You can click on the title to read that older post. The main contention in that article was that I saw a potential paradigm shift in the way the option market reflected risk in APPL. The article today will focus on the same topic -- but with empirical evidence not from the implied volatility side (forward looking), but from the historical realized volatility side (backward looking).

Here's a quick snippet from the prior article, and then four charts which I find incredibly compelling.

Older Post
[H]ere'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 a free fall from an all-time high, the implied only hit 32.55%.

[W]ith 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.
End Older Post

Now to the historical vol measures.  First, I have included the HV180™ chart and below that the HV360™ chart for AAPL over two-years. Note that HV is measured in trading days (not calendar days like implied vol), so HV180™ represents an average of ~9 months of data and HV360™ represents an average of ~18 months of data. So, in English, these are long-term trends not affected by short lived stock volatility.



I've drawn that yellow horizontal line to make it easier to see the high. What we can see here is that AAPL is now at multi-year highs for the very long-term HV180™ and HV360™ measures.

A fair question to ask, is, "how does this compare to the broader market?" Of course, the rationale being, if AAPL is mirroring the overall market, then this is not a firm specific trend, it's a coincidental data point.

Below I have included the same two charts, but have added the long-term HV for SPY as well.

AAPL HV180™ vs SPY HV180™

AAPL HV360™ vs SPY HV360™

I've highlighted the growing vol difference for both measures. The long-term HV measures for AAPL are rising as the SPY long-term HV measures are flattening. It bears repeating that the charts we're looking at here comprise of 9 months and 18 months of closing stock price data -- these are not averages that move easily with the blowing of the wind. These are very long-term measures for the largest company in the world.

The bottom line, in my opinion, whether it's b/c of the loss of Steve jobs, or a variety of other technology specific reasons (or all combined), AAPL is no longer the AAPL we once knew. The implied volatility (option market forward looking measures) bear this out, and the empirical historical stock movement bears it out as well.

The old AAPL is no more. And new AAPL is a riskier entity -- so says the option market and so says the empirical historical long-term stock returns.

This is a different company -- and the market doesn't know what that means yet.

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