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AAPL Calls: The Lottery Ticket Effect In Action?
Just last week we highlighted the behavioral bias writ large in the Mega Millions lottery via Dylan Grice's boredom discount concept. The same psychological tendency that overprices lottery tickets (relative to their expected value) seems very evident in the price action of everyone's favorite economy market tech-stock, Apple (and most specifically Apple Options). Since the price of Apple's shares skyrocketed above $500 (around early February), two rather significant (and very concerning) patterns have emerged. The first is the rotation from Apple stock into options as Apple options volumes erupted - almost tripling since the start of the year (from very stable levels for the past few years). Call option volumes have also massively increased relative to Put option volumes. However, while this suggests 'new' entrants lining up to buy their Apple lottery ticket, it is the 'pricing' of these options that is most worrisome as while dropping $1 on a lottery ticket will not break the retirement account - the divergence between Apple Options volatility and the broad market's volatility suggests a huge demand and willingness to overpay. Volatility tends to be the cleanest way to judge demand for options and since late January, the premium for Apple options has exploded (even as its share price rose and rose - breaking the empirical link between the two) as the 'optical cheapness' of Apple options compared to Apple's share price drew in the lottery ticket-buyers. Of course this in no way points to an end to the buying of Apple lottery tickets but the recognition of 'overpaying' - even as Apple's share price reaches all-time highs once again - will eventually slow demand for a levered bet on a new life.
Apple Option Volumes have risen dramatically - increasing three-fold since the start of the year with Calls outweighing puts dramatically...
but it is the 'over-paying' for the optically cheap Apple options that is the most worrisome...
As the lower pane shows the rapid and dramatic difference between Apple's 'expensive' options and the market's - simply put, lured in by the low (affordable) cost of options relative to shares and the unstoppable momentum, investors are buying calls regardless of the expense (i.e. buying a $1 lottery ticket for $2 or more).
Today is most notable as AAPL's price rises to new a highs and Call option vols rise 3pts. The premium for AAPL calls over the market's risk premium is its highest since mid-2008 - when Vols were dramatically higher than current levels.
The point is that, at some point - should vol collapse - even a surging AAPL share price will leave options prices falling and investors scratching their TVIX-ridden heads at the odd reality.
Charts: Bloomberg
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So does this mean long term, say 1 year, OTM puts are a good bet right now?
Can't Direxion just cut to the chase and come out with a 3X leveraged Bull AAPL ETF so that we can buy calls on that as well?
aaaand que the end of day melt up.
Indeed. How about some analysis on how AAPL puts are priced? Don't tell us not to buy AAPL calls without telling us something about AAPL puts.
Or, tell us about how fast a sell-AAPL-covered-call strategy would pay itself back with the calls so egregiously overpriced.
Help us make some $$$ on this!
The ghost of Steve Jobs is smiling. No doubt his widow and fellow co-workers too.
I'll take 100 June 550 puts for 10.50 Alex.
So, is Apple causing the noon meltup in the market? This could close green for the day.
Bennie and the LaserJets.
Well they can focus on rescuing equity markets all they want, but each time they do it makes it worse at the gas pumps. The stock pumping monkeys are going to have to decide quickly which course theyre taking.
So with call premiums being so high, why not just buy the stock and immediately write an at-the-money call? Sure, it's not going to be a "lottery jackpot", but this approach will throw off a nice amount of income each month and provide some downside protection in the event of a sell-off. And you collect the dividend too, once they start paying it.
I'm just trying to understand this--you would do this expecting the call not to get exercised, so you keep your stock and sell what you expect to be a worthless call option to some schmo for a premium? The only way that can work is if A) the stock doesn't rise enough for the call to be ITM, or B) the stock price falls and the call expires worthless. Neither is a good bet for AAPL right now.
I used to try these types of strategies in my simulated account all the time because I know that big institutions do things like this. The trouble is, unless you hold a large block of stock to begin with, just selling a call for your measly few hundred shares isn't going to make you any money and you still pay broker fees and a tax on whatever you do make.
The only way to make it big is selling uncovered calls, and there you are just as likely to lose your house, or whatever other assets they can grab when you the margin call comes in.
You pocket the premium, and if the call gets exercised, you just start over again. If the call does not get exercised, you write another one with the same strike price immediately after expiration. The idea is to just keep collecting the call premium and whatever dividends might be paid.
This works pretty consistently on the weeklies. You can either make theta your bitch, or be theta's bitch. Option 1 generates more consistently good returns.
OT but fun: Vinnie McCrudden sentenced...still writing angry letters.
http://www.smh.com.au/business/world-business/exus-trader-jailed-for-death-threats-20120407-1whnr.html
Family Guy - Bill Gates helps with an iPod?
http://www.youtube.com/watch?v=16tWxbwAQ80 (0:16)
The Simpsons - Mapple Store
http://www.youtube.com/watch?v=7L2fsubA2-c (1:58)
Futurama - EyePhone
http://www.youtube.com/watch?v=EaHUpWuqNHY (0:46)
Dumb basterds...
http://www.youtube.com/watch?v=7-D7bVxhQB0 (0:20)
MoMo's have to buy lottery tickets to help beat their Lipper average...
What could possibly go wrong?
I think this analysis may be flawed as it assumes a relationship in the implied vol's between everyone's favorite stock and the S&P. Wouldnt a more robust analysis consider implied vol relative to historical vol of the underlying ? I mean S&P is up ~9% YTD and AAPL is up like ~45%. 30D HV is at ~10% for S&P vs. 24% for APPL so this appears to support the spread the author is commenting on.
...and Goldman is the one selling those calls to the muppets.
I've also noticed that the nuanced characteristics of the gold price have changed since the beginning of February. Something smells fishy and it ain't me.
No real price action in Asian trading time zones...all action in the US, sometimes a kick-start in London. Soon after Tyler ran the "Overnight Gold Trade"story, it died.
Good call linking it to the article. SKOptions have gone strangley quiet on the matter. I might contact them... Having said that, don't tell anyone, but shorting at around midnight and longing at late afternoon seems to be working (for now). Not enough empirical data. I'm sure the dynamic will change soon though.
Mr. Eric Swarts has a kindly reminder about the largest market cap in the world contest:
http://www.marketanthropology.com/2012/04/586-billion-caution-flags.html
rotten AAPL (yeah old but funny anyway)
Gonna be rough when earning dissapoint.
holy shit, he's not kidding....53% above strike for may options....how can anyone buying it win unless it goes to 1000
Sucker born every minute. MM's raking it in I'm sure, LOL!
pfheww , i was almost worried when reading the title that volume was in the PUTS... oh well too bad for those call buyers ...
I learn something everyday at ZH. Today it is this:
"You Call Up your friend to talk, and when you're done, you Put Down the phone. "
Appl's, iPad [notebook] is the KING, most would agree without an argument,... but the iphone has hit a wall! Lookout below?
jmo