Here’s why rising interest rates and low implied volatility make Apple a potential perfect pullback put play.
Stocks overall seem to be holding major resistance. $4200 is still the wall for the S&P 500.
The largest market cap stock, Apple, is certainly no exception. Apple stock is about where it was a year ago. Will it go higher now is the question.
Here’s a quick comparison of Apple then (April 2002) versus now. And now why you can consider buying a relatively cheap put.
interest rate
The Fed has raised rates dramatically over the past 12 months. Currently, the fed funds rate is 4.75% to 5%. This time last April the fed funds rate was less than 1%.
The 10-year Treasury yield is also much higher today than it was a year ago. Then it yielded below 2.75%. Today it is more than 3.5%. Undoubtedly a significant increase in interest rates. Yet stocks like Apple don’t seem to care.
evaluation
This magnitude of rise in interest rates should significantly compress valuation metrics such as price/earnings (P/E) and price sales (P/S). Instead, the AAPL P/E ratio is up a full point from 27 to 28. The P/S ratio for Apple is virtually where it was at just under 7 a year ago.
APPL’s stock has returned to the same multiples that signaled the top in the past. The last time the P/E was this rich was around 28 last August—right before the punitive pullback.
Given that the Fed has signaled that it is unlikely to cut rates anytime soon, a sustained expansion of the valuation multiple from these current high levels is unlikely. This will significantly increase AAPL stock price in the coming months. It is also interesting to note that the magnitude of the current rally is almost on par with the magnitude of the previous big rally that ended in August—as seen in the chart.
Implied Volatility (IV)
Implied volatility in Apple options is down significantly from a year ago. At the time, the at-the-money July $165 put carried an IV below 33. Today, the same at-the-money put trades with an IV of about 25. This 25% drop in IV means option prices are much cheaper than they are now. 12 months ago (for both calls and puts).
How cheap? The table below puts everything together.
Now and then
- There are now 91 days until expiration of the $165 put in July (DTE). Then there were 85 DTEs in the same puts. All things being equal, puts should be slightly more expensive today as they have 6 more days to expiration (7.06% more).
- AAPL stock now closes at $165.02. Apple then closed at $166.42. All things being equal, puts should be slightly more expensive today as the stock is $1.40 lower (0.84%).
- Now AAPL July $165 puts are worth $7.45. Then AAPL July $165 puts were worth $8.95. Why are puts today so much cheaper (16.76%) than puts a year ago?
- Now IV is at 24.97. Then IV was at 32.76. Therefore, a large reduction in implied volatility (23.78%) makes what should now be slightly more expensive based on higher DTE and lower stock prices and now based on much lower IVs.
Investors and traders looking to take short positions in stocks like Apple would be wise to consider the benefits of buying cheap puts. Defining risk and reducing the cost of playing for a pullback makes more sense now than at any time in the last 12 months.
POWR options
What to do next?
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All the best!
Tim Biggum
Editor, POWR Options Newsletter
Shares closed up $0.32 (+0.08%) at $412.20 on Friday. Year-to-date, it is up 8.20%, versus a % increase in the benchmark S&P 500 index over the same period.
About the Author: Tim Biggum
Tim spent 13 years as Chief Options Strategist at Mann Securities in Chicago, 4 years as Lead Options Strategist at Thinkerswim, and 3 years as a Market Maker for First Options in Chicago. He appears regularly on Bloomberg TV and is a weekly contributor to the TD Ameritrade Network “Morning Trade Live.” He is passionate about making the complex world of options more understandable and therefore more useful to the everyday trader. Tim is the editor of POWR options Newsletter Learn more about Tim’s background with links to his most recent articles.
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