Schaeffer's Trading Floor Blog

Apple Inc. Surrounded by High Hopes Ahead of Earnings

Apple Inc. options tend to price in high implied volatility

by 7/14/2014 1:31 PM
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Options traders have been taking a bullish angle on Apple (NASDAQ:AAPL) lately, according to data from the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX). During the past 10 days, speculators on the ISE, CBOE, and PHLX have bought to open 3.13 calls for every put on Apple. This ratio arrives in the 98th percentile of its annual range, which means options players have shown a greater preference for bullish bets over bearish just 2% of the time during the past year.

Likewise, short sellers appear to be abandoning their bearish bets on Apple. Short interest on the stock dropped by 10.8% during the most recent reporting period, and now accounts for a scant 1.9% of the equity's float.

With shares of Apple up about 21% year-to-date -- and tagging a new 52-week high of $96.89 earlier today -- the capitulation by short sellers isn't too surprising. This is especially true as Apple's fiscal third-quarter earnings report approaches. The company is due to unveil its quarterly results after the market closes next Tuesday, July 22. One week after the iPhone purveyor's April 23 earnings report, Apple stock was up 12.5%.

Weekly Chart of Apple since February 2012

Analysts, meanwhile, are perpetually bullish on Apple. The stock boasts 76% "buy" ratings from brokerage firms, and garnered a few more endorsements ahead of today's session. Specifically, Barclays upgraded the stock to "overweight" from "equal weight," and increased its price target to $110 from $95. Morgan Stanley also weighed in, lifting its price target to $110 from $99 and backing its own "overweight" opinion.

On the charts, Apple is in between two key round-number levels. The $90 area acted as resistance in 2012, but more recently appears to have stepped up as support. Meanwhile, in the wake of the tech company's recent stock split, the overhead $100 region now coincides with the site of Apple's September 2012 record high.

Whether bullish or bearish on the stock's prospects, options players should approach Apple with caution. The stock's Schaeffer's Volatility Scorecard (SVS) is an anemic 5 -- which means that over the past year, the options market has tended to price in greater volatility than Apple has actually realized.

Right now, at-the-money options due to expire on Friday, July 25 -- the next expiration date after Apple's earnings report -- are pricing in implied volatility of 36.5%. Looking back over the past eight earnings reports, Apple averages a loss of 0.8% three days later, with returns ranging from a gain of 13.2% to a drop of 12.5%.

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