Is The Options Market Partying Like It's 1999?

How Apple Inc. (NASDAQ:AAPL) is keeping market volatility alive

Apr 28, 2015 at 8:03 AM
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Is tech in a 1999-esque bubble? With the Nazz hitting new highs, I'm contractually obligated to ask that question. If I had a TV show, I would have to have two guests on. One would say, "Yes, of course we are in a bubble, sell everything before it's too late." The other would say, "No. Unlike 1999, multiples are not extended, especially for mature companies."

And we would accomplish nothing. And, in all fairness, "bubble" is such an amorphous concept. And it's really not helpful to investors. If something is officially declared a bubble, should you run and hide from it? Lots of traders embrace it and try to ride the momentum. Yes, it implies you should play a bit of defense, shorten your holding periods, et al. But maybe those don't represent bad ideas, no matter what's going on. Besides, calling tops and pauses isn't all that simple:

Count me in the "no bubble" camp. That's not because I think stocks are cheap or unfat or whatever, just that I think it's a silly topic.

I will say this, though -- we may have a similarity to 1999 in the options space. Way back when, we saw stock volatility lift alongside market volatility. You even saw negative skew on options boards. That is, higher strikes carried higher implied volatility.

We don't have skew issues now, but we do have a high-profile stock volatility surge. Apple Inc. (NASDAQ:AAPL)!

Granted, it was a pre-earnings volatility pop. But, it was more than just anticipation of the numbers. This, from Bloomberg:

A Chicago Board Options Exchange volatility gauge for Apple shares has jumped 42 percent since a low in March, while a measure of Nasdaq 100 swings has fallen 2.3 percent. The Apple VIX closed at 2.4 times the level of the Nasdaq 100 VIX last week, the highest ratio between the two since October 2013.

The market priced in about a 5.5% move on earnings … and their announcement of cash-allocation plans. That was pretty average for AAPL, and suggests the implied vol lift may persist, assuming a bit of give-back this morning.

And, we can make the case that AAPL IS the economy and IS the market these days. An actual volatility lift here is literally a self-fulfilling prophecy for a lift in market volatility. Can it keep up the volatility after today? We'll see. So, volatility bulls, you have that going for you, which is nice!

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


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