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New Apple Inc. (AAPL) High Inspires Eleventh-Hour Bets

Apple Inc. weekly options remain in vogue

by 5/22/2014 11:17 AM
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Option Brief: Apple Inc. (NASDAQ:AAPL) once again hit a new annual high, and once again short-term option traders are flocking to the iPhone maker. Reflecting this, the stock's 30-day at-the-money (ATM) implied volatility (IV) is creeping higher, last seen at 18.1%, and nine of the 10 most active contracts expire at tomorrow's close.

Overall, calls have the edge over puts, with about 52,000 of the former and 33,000 of the latter exchanged so far. Most active are the weekly 5/23 607.50-strike call and 605-strike put, where around 6,700 and 6,500 contracts have traded, respectively. At both strikes, a healthy portion of the options crossed on the ask side, IV is up more than 3 percentage points, and volume has surpassed open interest, hinting at buy-to-open activity.

The calls -- which were briefly in the money (ITM) when AAPL peaked at $607.86 earlier today -- traded for a volume-weighted average price (VWAP) of $1.77. As such, buyers will make money if the stock extends its quest for new highs, and settles north of $609.27 (strike plus VWAP) at tomorrow's close. Beyond that breakeven mark, in fact, profit potential is theoretically unlimited. However, seeing as AAPL has since erased its early gains -- the shares were last seen 0.2% lower at $605.38 -- delta on the call has dropped to 0.37 from 0.43 at yesterday's close. In other words, the calls have about a 37% chance of expiring in the money.

Meanwhile, the 605-strike puts traded for a VWAP of $2.09, making breakeven at expiration $602.91 (strike minus VWAP). The buyers' reward will increase with each step south of this level AAPL takes through the end of the week. In light of AAPL's mid-morning dip, delta on the put now stands at negative 0.47, compared to negative 0.42 last night, implying a 47% chance of an ITM finish at expiration.

Risk for both the call and put buyers is capped at the initial premium paid, should AAPL finish below or atop the strikes, respectively, tomorrow. Despite today's uptick in 30-day ATM IV, the equity's short-term contracts remain attractively priced. In fact, AAPL's Schaeffer's Volatility Index (SVI) of 18% stands just 11 percentage points from an annual low, suggesting the security's front-month contracts are inexpensive, on a historical basis.

As alluded to earlier, Apple Inc. (NASDAQ:AAPL) touched a new annual high out of the gate, but has since surrendered its lead. From a longer-term perspective, the stock is 7.9% higher year-to-date, and has outperformed the broader S&P 500 Index (SPX) by 14.5 percentage points during the past three months. As a result, the equity's Relative Strength Index (RSI) rests at 71 -- in overbought territory, suggesting a short-term breather may be in the cards for the shares.

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