With AAPL's stock having recently experienced notable declines, our attention shifts towards the options skew markets. Through examining the options skew, we seek to uncover insights into how traders might be responding to these declines and gauging their sentiments.
AAPL's Recent Performance
AAPL's recent performance serves as a backdrop for our investigation. With a decline of 10% in just a month, AAPL has diverged from the broader market's more modest 3.3% fall during the same period. Given AAPL's recent performance, we turn to the options markets skew to gain insights into how traders maybe feeling about the stock's outlook. This will help us understand how traders are pricing bearish puts in comparison to bullish calls.
Measuring AAPL Option Skew: The Risk Reversal Strategy Benchmark
AAPL Risk Reversal Strategy Benchmark
To understand option skew, we adopt an approach that compares the premium of an OTM put option, positioned 5% below the at-the-money (ATM) strike, with the premium of an OTM call option, placed 5% above the ATM strike. Our focus is on the 3-month option (90 Days), which offers a meaningful timeframe for analysis.
Consider a trading strategy that involves purchasing a call option while simultaneously selling a put option – a strategy known as a risk reversal. By comparing the premiums of these two options, we can infer the market's sentiment toward bullish and bearish positions.
If the net result of this comparison is a credit, it implies a relatively higher demand for bearish puts, indicating potential downside concerns. Conversely, a net debit suggests a stronger inclination towards bullish calls, potentially signifying optimism in the market. In AAPL's context, the current net debit stands at 0.4%, with a rising trend (as you can see from the chart below), indicating a growing preference for bullish calls.
Risk Reversal Benchamark Chart: A Rising Trend Towards Bullish Calls
Importantly, this shift doesn't necessarily denote a straightforward bullish perspective. It's possible that the rise reflects a heightened demand for upside calls, which could serve as a hedge for short positions. Moreover, traders might be strategically employing bullish options strategies as substitutes for direct stock investments, contributing to increased demand for bullish calls.
Conclusion
While AAPL's share prices have experienced a notable decline, significantly underperforming the market, an interesting contrast emerges from the options markets. Despite this decline, the options markets aren't indicating a continuation of bearish sentiment. Instead, they seem to be positioning prices in a way that suggests a potential rebound on the upside. This intriguing dynamic highlights how options traders perceive a possible turnaround, offering a distinct perspective amidst the backdrop of recent market performance.
Disclaimer
The information provided in this blog post is intended for informational and educational purposes only. It is not intended to be construed as financial advice or a recommendation to engage in any trading or investment activities. The content presented here does not consider individual financial situations, risk tolerances, or investment goals, and it should not be used as a substitute for professional financial advice.
