Just last week we highlighted [7] 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...
[8]
but it is the 'over-paying' for the optically cheap Apple options that is the most worrisome...
[9]
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.
[10]
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