Hi guys, I wanted to go over a potentially winning option trade for tomorrow using AAPL weekly options. Tomorrow is Friday 12th of August 2011… We’ve seen a very volatile couple of weeks in the markets especially in the last week with the market crashing tremendously. For example you can see here, the SPY, S& P 500 index has gone down from 134 points on the 25th of July and now we’re at 114 points approximately so a tremendous crash in the value of the market. Now what I wanted to go over was a potentially winning option trade for tomorrow and this is a product of my in-depth analysis of a few stocks and their price movement tendencies. So I’m just going here to an Excel analysis sheet that I prepared and now this is of AAPL (Apple) stock. If you have a look at this graph this is a graph of the average standard deviation price changes which is divided into weekdays. The blue is the close to close price change, the red is the close to open price change and the green is the intraday price change.
So what we can see here is that AAPL (Apple) exhibits increased intraday volatility on Mondays and Fridays. Friday is expiration day every week for AAPL since Apple has weekly options (or weeklys). This means that the price of the options have been mostly eroded by time decay, so Fridays can make a potentially great option trading day. Now what we can also see if we go to this table over here is that currently one standard deviation for AAPL is equivalent to 9 points. It’s increased a lot recently due to the massive volatility spike.
Now if we go here to a profit and loss graph we can see that Apple at the money (ATM) straddle (AAPL is trading at 370 points) we can see that the ATM straddle is trading at $8.93 and the theta is minus 213. That means tomorrow the straddle with be worth less approximately $2, so we can expect the straddle to be worth $7 roughly. What this means is that the breakeven point at expiration for the straddle will be plus or minus $7 to either side.
Remember that a one standard deviation price is $9. So going back to this information we expect that the open to close (intraday) price change is one standard deviation, or over 9 points which should be in our profit range.
If we have a look at another metric here, which is the average intraday price range in terms of standard deviations, we can see that the average range is 1.53 standard deviations or approximately 13 or 14 points. And finally we can see that the percentage day changes over 7 points is over 50% for AAPL, so this makes it a potentially excellent option trade for this Friday.