Options volume and volatility were both spiking on shares of Apple, ahead of its quarterly earnings report, expected after Tuesday's market close.
Monday’s trading marks the “highest volatility that we have seen in over a year in apple options,” says Tim Biggams, Options Strategist at Trading Block.
The increased demand and increased volatility suggest that traders are anticipating a big move in the stock price around the earnings report. Shares of Apple have fallen just over 10 percent in the last two weeks.
Especially active are the short term options or “weekly” options, expiring this Friday. At-the-money options are trading near 80 percent volatility, costing traders about $44 for the put/call combination. Put volatility is trading at a slight premium to call volatility say traders.
With Apple stock near $570 a share and assuming no other position, an investor buying that straddle is expecting a price move of about 8 percent before Friday.
The 10 percent slide in the stock over the past two weeks, and anticipation of more downside, is being reflected in the product offerings of the options market.
“Thursday the CBOE brought out $550 puts—the lowest strike on the run was the $550. On Friday morning—they brought out new options as low as $520. Today they brought out $480 puts,” says Bill Lefkowitz, vFinance Options Strategist.
Increased offerings of puts by the exchange reflects increased demand by investors. “People are very concerned about the iPads sitting on shelves,” says Lefkowitz.
Lefkowitz also notes that when the exchange adds strikes after the start date of a “weekly” contract, the options trade for fewer days making it something less than a “weekly” option.
But, according to a new report from Birinyi Associates, history shows that expectations of a wild move may be misplaced.
“Regardless of whether the stock is higher or lower after the report, the next day from the open to the close AAPL trades lower 68 percent of the time for an average loss of 0.5 percent,” writes the analyst.
But, that was then and this is now.
Options for expiration in May, June and July offer cheaper alternatives to the elevated prices in the shorter dates. Some traders are taking advantage of the unusually high price differentials by buying calendar spreads or, selling the shorter dated options and buying the longer term options.
Early in the session, more than 138,000 thousand contracts had traded, "more than double the normal volume,” according to Angela Miles, a journalist based at the CBOE.