Arcángel de Jesús Montoya
3
All posts from Arcángel de Jesús Montoya
Arcángel de Jesús Montoya in Money Trafficking,

Buy Apple's Straddles Tomorrow Before Market Close

Apple Inc. (AAPL), company that designs, manufactures and markets mobile communication and media devices, personal computers, and portable digital music players, and a variety of related software, services, peripherals, networking solutions, and third-party digital content and applications, is reporting earnings on Tuesday, July 26, after market close:

(Source: TD Waterhouse)

The company beat earnings estimates in 88% of time in the last eight quarters, underperforming in 12% of time, and has seen moderate volatility in the market price of its stock over the last three months:

The market participants expect the following numbers over the next few quarters, including the upcoming one:

(Source: TD Waterhouse)

On the other hand, market data show that the August options are relatively cheap:

(Source: TD Waterhouse)

The monthly straddles (options with a strike price of $97.50) are worth around 5.2% of the current market price of the stock. Historically, the stock has been more volatile than that on a monthly basis over the last year:

(Source: Google Finance. Calculations by author)

As you can see, the stock has had a monthly standard deviation of 8.0% over the last 52 weeks, while the straddle expiring in a bit less than a month has an implied monthly volatility of around 7.6% (calculated based on 19 business days remaining until expiration), also including volatility from the earnings event this week. I therefore see signs of moderate undervaluation in these options.

What do you think of this trade?