Schaeffer's Trading Floor Blog

What the Apple Inc. (AAPL) Split Could Mean for Options Traders

Will Apple's 'new' price impact implied and realized volatility?

by 6/10/2014 7:28 AM
Stocks quoted in this article:

If you own Apple Inc. (NASDAQ:AAPL), and get all your stock news from Squawk Box, you may have spit out your coffee this morning:

Squawk Box Screen Grab of Apple Inc. (AAPL)

Of course unless you live in a cave, you probably know that AAPL split 7:1, effective after Friday's close. Even if you live in a cave, you probably know that, assuming you have an iPad and/or iPhone, and can get WiFi in there. And let's face it, the fact that even cave dwellers in 2014 own Apple products is a good reason why the stock continues to do so well and can "afford" to split in 2014.

And by "afford" I mean, "the stock is so high, why not." In case you're not familiar with splits, here's a quick "VOX"-planation. Long story short is that is that splits obviously have zero effect on the value of a company.

They can impact options, however. The absolute price of a stock really does impact the perception of risk and reward. And in the case of very low-priced stocks, it affects the realized volatility itself. A $1 stock is simply more likely to trade in a 5-cent range than a $10 stock is to trade in a 50-cent range.

Setting aside those very cheap dollar names as the exception, the higher the dollar value of a share, the more we seem to fear a sizable downside move, even if we're talking the same percentages. The prospect of a $35 drop in a $700 stock sounds kind of scary, whereas no one gets particularly worked up guarding against a $5 drop in a $100 stock. Yet obviously, it's the same exact thing.

This is just an anecdotal observation. Google Inc (NASDAQ:GOOGL) has carried a high price tag in absolute terms pretty much since Day 1, and GOOG options have perpetually traded at an overpriced implied volatility vs. its backward-looking realized volatility. But there's no parallel universe where GOOG splits its stock over and over again, while everything else about the stock remains the same, so as such there's no way to "prove" the volatility would be different if we saw GOOG at $56 on the board instead of $560.

AAPL options tend to overprice realized volatility as well. Right now, the "VIX" of AAPL is 23, while 10-day realized volatility is about 15. That's a reasonably typical setup here. The stock tends to gap a bit around earnings reports and well-anticipated product announcements, and move relatively slowly at all other times.

Now that AAPL has a $90 full instead of a $600+ full, it's possible that the perception of risk here changes, and the spread between implied and realized volatility contracts. At least that's my very unscientific theory.

Disclaimer: Mr. Warner's opinions expressed above do not necessarily represent the views of Schaeffer's Investment Research.

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