The AAPL Earnings Short Straddle [Follow Up]

• stevenplace
• January 22nd, 2009

AAPL announced yesterday, and they beat market expectations. At the time of this writing the stock was up to 89.50, and 8% move premarket. It seems like the gamblers to the long side got a pretty good payday.

But what would have been a good options strategy?

Novice option traders would probably be playing directional plays, buying straight puts or calls, hoping for that homerun. This is not a good strategy; if you did this trade 1000 times, your expectancy would be significantly negative. Because not only do you have the risk of the stock price going against you (delta risk), you also have the problem of volatility going down.

When there’s a large event coming up for a company, there’s plenty of uncertainty behind it, which means that the implied volatility in options will be higher than if the event weren’t there. So even if the play goes your way, you can still get a “volatility crush” and lose on your options position.

Although, the IV in AAPL wasn’t really high pre-earnings, historically. Adam Warner points out that

Options volatility in the 60-70 volatility range, which really is not all that high.

So there would be potential for buying options and hoping, but we’ll see after the market opens and we get the opening prices for the options chain.

A much better play would be to get into a short straddle or strangle. This is a spread in which you make money provided the stock doesn’t go to far away from the strike in which you bought it. Andy Swan was looking for potential AAPL plays yesterday and I pointed this one out:

This means that as long as AAPL were to stay in between that price range within 30 days, then it’s a profitable trade.

But you can make money off this on a quick flip. You can take advantage of that ubiquitous volatility crush and since your position is negative vega, your position will pick up some money as well. From there you can close the position, leg out depending on which way the stock moved, or hedge against your position by buying/selling the underlying.

Andy decided to pick up a strangle rather than a straddle:

That too will be a pretty profitable position on the open, and I have a feeling that the way this market is chopping around that it will stay within 70 and 95, so you could ride this one out through expiration.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

blog comments powered by Disqus