Apple Inc. (NASDAQ:AAPL) is expected to unveil the next iPhone in early September, and shares of the company’s stock have been rising ahead of that event. Carl Icahn’s tweet about his investment in the company also gave it a boost. Now strategists at Susquehanna Financial Group say there may be some protective measures investors can take if they still want to remain exposed to Apple but want to minimize their risk.
Apple’s volatility levels are lower
Derivatives strategists Christopher Jacobson and Trevor S Mottl issued a report to investors highlighting some of their suggestions. They note that the implied volatility levels associated with Apple are fairly low right now when compared to levels over the last two years. They said currently Apple Inc. (NASDAQ:AAPL)’s 60-day implied volatility is 26 percent and ranks in the 14th percentile.
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They note that volatility levels have spiked over the last week as the stock has risen a little less than 10 percent and is now over 26 percent higher than its lows in June. They also said Apple’s skew levels have fallen and now favor “call spreads as a way to maintain upside exposure while limiting downside.
Buying options for Apple
The strategists said buying Apple puts against long positions is not as cost effective because of the bounce in volatility. Also the flat skew lowers the benefit from put-spreads against long positions while also limiting downside protection.
They provide suggestions for investors who are thinking about remaining long into the unveiling of the iPhone 5S but are concerned that the launch of the device will disappoint. They favor lower cost spreads rather than outright options when it comes to Apple Inc. (NASDAQ:AAPL) right now. They said it looks like the 60 day skew has shifted slightly toward calls.
They remind investors that “skew is a measure of the volatility differential between the downside puts and the upside calls.” They said although usually puts trade at a premium because of the demand for insurance, in this case the balance has shifted the premium to calls.
Maintaining exposure in Apple while limiting downside risk
The analysts say Apple investors could maintain their exposure to Apple on a capped basis by replacing their stock with a September $500 / $530 call spread. This would mean buying the $500 calls and selling the $530 calls. Looking at Thursday’s closing stock price, they estimated that the spread could be bought for $10 and would create a breakeven price of $510. The downside risk would then be limited to the premium paid, while maximum profit would be $20 after paying the premium.