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Apple's Earnings Risk Is Enormous (And The Truth Lies In The Options Market)

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January 26, 2015 1:23 pm
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This article was produced by Capital Market Labs. Learn how the company is bringing the power of living data to the world of finance.

Apple Inc. (NASDAQ: AAPL) will release earnings this Tuesday, and they're being watched by everyone in the financial markets.

One area being overlooked, though, is the options market.

Risk of future movements in stock price is reflected in the option market, in the form of implied volatility. Let’s look at the 30-day implied volatility over the last year for Apple.

aaplopt1.jpg

Implied volatility is the forward-looking risk in the equity price, as reflected by the option market (IV30™ looks forward exactly 30 calendar days).

In English, the red curve is the risk in future stock price movement. The blue “E” icons represent earnings release dates, circled in yellow. Notice the levels of risk priced into earnings for the prior four earnings releases, and then the level of risk this week.

Let’s make it easier with this next chart…

aaplopt2.jpg

That's the same chart, though all data points other than the past earnings releases (and this week) have been removed. It's clear: The level of risk (IV30) now is higher than it has been for any of the prior earnings releases in the last year.

But there’s more…

Approaching the earnings release, implied volatility should rise. That trend is evident in the first chart. Rather than explain why that happens, let’s accept it as a tautology, and then apply it to this situation.

In short:

The level of risk as reflected by the option market into Apple earnings is higher now than it has been for any of the prior earnings, and…that risk level should rise moving closer to the earnings date.

Is there risk in Apple earnings?

Yes.

Is the risk high?

Yes.

How high is it?

Higher than at any point in the last year, including four prior earnings releases. So buckle up. The information Apple is about to share is enormous.

Ophir Gottlieb can be found on Twitter @OphirGottlieb


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