Rotten Apple? - AAPL is Breaking Down and the Options are Still Inexplicably Cheap

APPLE STOCK IS BREAKING DOWN

Apple is trying desperately to prop up its stock... but buying back more than $100 billion worth of shares in the last year and increasing dividends to record levels isn't helping. After Q1 results that beat estimates, reports of supplier cuts lead investors to dump shares as it signaled iphone demand is crawling to a halt.

Furthermore, the technical pattern is setting up for a good sized breakdown:

Apple is obviously a large component of the technology sector which continues to lag the broader market and is also in a technical breakdown pattern. If the broader market comes under stress, it could be a bumpy ride down for Apple shares.

Here's a bearish Optimized Positive Convexity trade for AAPL:

The projected return for AAPL to the June 10th expiration is -11.13%
The implied volatility is for the at-the-money put is a staggeringly low 20.4% vs a projected volatility of more than 27%!
This is also the day before a large dividend is to be paid out... the mispricing here is mind blowing!

Maximum risk is ($10,000)
Long 323 shares AAPL at $93.42
Long 25 June 10th $93.5 put options at $2.38
Long 1 June 10th $92 put option at $1.73
Long 29 June 10th $90.5 put options at $1.23

The breakeven price is $89.82 which is less than 2 ATRs from its current price of $93.42
Convexity approaches 30 at 10% price shock.

Comments

Modeling Credit Risk...

Here's a link to a presentation I gave back in August on modeling credit risk. If anyone would like a copy of the slides, go ahead and drop me a line... https://www.gotostage.com/channel/39b3bd2dd467480a8200e7468c765143/recording/37684fe4e655449f9b473ec796241567/watch Timeline of the presentation: Presentation Begins: 0:58:00 Logistic Regression: ...

Variable Types for Principal Component & Factor Modeling

TRANSFORMING RAW DATA INTO INSIGHT & ACTIONABLE INFORMATION After reading the book Moneyball for the first time, I built a factor model in hopes of finding a way to finally be competitive in my fantasy baseball league - which I had consistently been terrible at. It worked immediately. By taking raw data and turning it into actionable information, I was able to solve a problem that had long perplexed me. It was like discovering a new power. What else could I do with this? Today, I build models for everything and have come a long way since that first simple spreadsheet but still use a lot of the same concepts. To build a traditional factor model, you would regress a dependent variable against a series of independent variables and use the resulting beta coefficients as the factor weights... assuming your resulting r-squared and t-test showed a meaningful relationship of course. Variables typically fall into one of two categories... continuous or dichotomous....

Convexity as a Technical Indicator - Applications of the Second Derivative...

WHAT'S IN A NAME? In investment parlance, the term 'convexity' is typically reserved for the topic of fixed income risk; especially in regards to debt with embedded optionality where negative convexity is a prominent pricing factor. However, it is important to recall that 'convexity' (or 'concavity', for that matter) is a mathematical measurement used to describe the second derivative of a continuous, nonlinear function on an interval. The issue with confining the term to a single connotation is that - for better or worse - investment tools have become increasingly nonlinear since the days of the 60/40 model and convexity is present in a number of applications. The extent to which it has been circumscribed to a single asset class is evident in equity option jargon where the second derivative of the pricing function is called 'gamma' instead of convexity. Of course, the argument could be made that the principle purpose of option vernacular is to c...

Blue Horseshoe Loves This Finance Blog

Search This Blog