The Apple Effect

Like its products or hate them, Apple(AAPL) is one of the most profitable and well-marketed firms on the planet. While some of us worried about what affect the announcement of Steve Job's leave of absence would have on the company, AAPL has continued to rally upward. In fact, those that bought that 'Jobs dip' are very happy campers; the stock is up almost 9% since the bottom of that announcement. When a widely held stock rallies to all-time highs, it can have a strange affect on both the stock and the volatility of the options.

For instance, owners of the stock are likely to sell calls against their stock in order to help protect some gains. Some traders will sell puts against the stock in an effort to make money if the stock goes up, or purchase the stock if it dips (kind of a proxy limit buy order). All this selling of premium can have a strange affect on the options themselves. At my company, Option Pit, we try to teach traders to take advantage of some of the mispricing that happens, whether it is buying or selling options. For instance, I think right now AAPL straddles are a screaming buy...again.

In December AAPL implied volatility hit an all time low. With AAPL trading at $320.00, investors could buy the January 320 straddle with about 35 days to expiration for about $19.00. At the time, AAPL had not been moving very much, so a straddle that needed a move of about 6% to be a winner was a touch of a gamble despite the low volatility. However, between then and expiration, that straddle expanded to over $26.00, before giving some of that away upon the 'Jobs dip.' A trader that was managing that straddle would have been able to make about 30% on that position on several occasions. Traders that simply purchased the super cheap calls would have done even better.

Right now, that at-the-money straddle is even cheaper than it was last December, at the same time the stock is actually moving. With AAPL trading at right around $355.00, I purchased a March 355 straddle for $19.80, an implied volatility of 21.55%. 21.50% is about the lowest level for AAPL implied volatility since the company stopped making the Apple IIe, at least a five-year low. Every time it has hit a level below 23% the volatility has bounced.

That straddle has 38 days to move $19.80. In the last 18 days AAPL has moved (on a high low basis) of about 147% more than 19.80, a realized high-low volatility of close to 40%. Yes, there was an event, yes we were bouncing off the Job's dip, but I have no reason to believe that AAPL couldn't be trading $375.00 or $335.00 over the next month. There are many possibilities that could drive the stock one way or another.

If more comes out about Steve Jobs, say hello to AAPL $300.00, if Jobs announces his return, say hello to AAPL $400.00. Some Verizon Wireless(VZ/VOD) news could come out, who knows? The point is that when implied volatility gets inexpensive, for whatever reason, selling premium turns into a bad idea, buying it, be it in the form of a call, a protective put or a straddle can make a lot of sense. If one has a directional opinion, now is the time to buy a put or a call. For those like me, who see both sides of the coin, I am very happy with my straddle purchase.

Trades: With AAPL trading $355.00, buy to open AAPL March 355 calls for 10.00 and buy to open the March 355 put for $9.80.

The net buy is an AAPL March 355 straddle for $19.80.

At the time of publication, Mark Sebastian held a position in AAPL.

Mark Sebastian is COO and Director of Education for Option Pit Option Mentoring. Sebastian is a former market maker on both the Chicago Board Options Exchange and the American Stock Exchange. Along with his role directing the path of education for Option Pit, Mark is currently the Director of Risk for a private hedge fund. He started the popular blog Option911, which is now the Option Pit blog. Sebastian has been published nationally on Yahoo! Finance, is a featured contributor for TheStreet's OptionsProfits, SFO, OptionsZone and is the managing editor for Expiring Monthly: The Option Traders Journal. Mark has a Bachelor's in Science from Villanova University.

On February 24, TheStreet's OptionsProfits is hosting a webinar featuring Dr. Paul Price of Beating Buffett. Dr. Price will discuss selling, rather than buying options as a keynote strategy. His basic premise is strategic use of option sales combined with solid fundamental analysis leads to wide statistical bands of high profitability while incurring below average risk.

OptionsProfits For actionable options trade ideas from a team of experts, visit TheStreet's OptionsProfits now.

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