Here’s why rates of interest increases and lower implied volatility make Apple a possible perfect pullback put play.
Stocks overall appear to be stalling out a significant resistance. $4200 continues to be a wall for the S&P 500.
The largest market cap stock, Apple, is definitely no exception. Apple stock is where it was back then a yr ago. Whether it heads even higher now’s the query.
Here’s a quick comparison of then (April 2002) versus now in Apple. And why now you could want to contemplate a comparatively low cost put buy.
Interest Rates
The Fed has raised rates dramatically over the past 12 months. Currently, the Fed Funds rate stands at 4.75% to five%. This time last April the Fed Funds rate was well under 1%.
10-year Treasury yield can be much higher today than a yr ago. Back then it yielded under 2.75%. Today it’s over 3.5%. Unquestionably a big rise in rates of interest. Yet stocks like Apple don’t appear to care.
Valuations
This magnitude of increase in rates of interest should make valuation metrics comparable to Price/Earnings (P/E) and Price Sales (P/S) noticeably contract. As a substitute, the AAPL P/E ratio is up a full point from 27 to twenty-eight. The P/S ratio for Apple stands at virtually the identical place from a yr ago at just below 7.
APPL stock is back to similar multiples that signaled tops previously. The last time P/E was this wealthy around 28 was last August-right before a punishing pullback.
Provided that the Fed has signaled it’s unlikely to chop rates anytime soon, a continued expansion of valuation multiples is unlikely from these current lofty levels. This may provide a substantial headwind to AAPL stock price over coming months. Plus interesting to notice that the magnitude of the present rally equates almost precisely to the magnitude of the previous major rally that led to August-as seen within the chart.
Implied Volatility (IV)
Implied volatility has dropped considerably in Apple options from a yr ago. Back then, at-the- money July $165 puts carried an IV just below 33. Today, similar at-the-money puts trade with an IV of roughly 25. This 25% drop in IV implies that option prices are less expensive now than 12 months earlier (for each calls and puts).
How less expensive? The table below puts things all together.
Now and Then
- Now the July $165 puts have 91 days until expiration (DTE). Then the identical puts had 85 DTE. Every little thing equal, the puts today must be more a bit of costlier since they’ve 6 days more until expiration (7.06% greater)
- Now AAPL stock closed at $165.02. Then Apple closed at $166.42. Every little thing being equal, the puts today must be a bit of costlier because the stock is $1.40 lower (0.84%)
- Now the AAPL July $165 puts are priced at $7.45. Then the AAPL July $165 puts were priced at $8.95. Why are the puts today so less expensive (16.76%) than the puts a yr ago?
- Now IV is at 24.97. Then IV was at 32.76. So, the large drop (23.78%) in implied volatility makes what must be a bit of costlier now based on more DTE and lower stock price so much cheaper now based on much lower IV.
Investors and traders trying to take a brief position in stocks like Apple could be sensible to contemplate the advantages of shopping for low cost puts. Defining the chance and lowering the associated fee to play for a pullback makes more sense now than it has at any time previously 12 months.
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All of the Best!
Tim Biggam
Editor, POWR Options Newsletter
shares closed at $412.20 on Friday, up $0.32 (+0.08%). 12 months-to-date, has gained 8.20%, versus a % rise within the benchmark S&P 500 index throughout the same period.
Concerning the Writer: Tim Biggam
Tim spent 13 years as Chief Options Strategist at Man Securities in Chicago, 4 years as Lead Options Strategist at ThinkorSwim and three years as a Market Maker for First Options in Chicago. He makes regular appearances on Bloomberg TV and is a weekly contributor to the TD Ameritrade Network “Morning Trade Live”. His overriding passion is to make the complex world of options more comprehensible and subsequently more useful to the on a regular basis trader.
Tim is the editor of the POWR Options newsletter. Learn more about Tim’s background, together with links to his most up-to-date articles.
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