By Greg Jensen
CEO and Founder, OptionsANIMAL
If you’ve been following the media this past week, you would think the only thing happening is that the New York Knicks got a new all-star caliber point guard in Jeremy Lin. The Harvard grad, who currently, is even more popular than that other Harvard guy who is planning on taking his social site public in a few months, has burst onto the basketball scene. This has been heaven sent manna for New York Knicks fans who have watched their shares of The Madison Square Garden Company (MSG) pop 14.5% this month since Lin has taken over point guard duties. Hey, in the pro sports world, anything is possible. Maybe even a Cubs world series…
Sorry, I got distracted in the abyss of the idea of a Cubs World Series and forgot about the other all-star that had an interesting week. I am not talking sports anymore. I’m talking about the market. The market had another solid week and the all-star stock that had an up and down week was none other than the brain child of the late Steve Jobs, Apple Inc. (AAPL) The rumors that swirled this week were nothing short of awesome as AAPL stock saw HUGE volatility in the 5 trading sessions.
On February 10th, AAPL closed the week at $493. This is of course in the middle of a very large bullish move. The bullish sentiment continued the next week with AAPL stock moving up and eventually peaking on Wednesday February 15th, at $526.29. The interesting thing about AAPL’s bullish move was the accompanying increase in implied volatility (IV).
To put it simply, implied volatility is a measurement of fear. Typically, when a stock is moving higher, fear is far from present. In fact, you will often times see implied volatility falling as a stock is rising. This divergence from the norm, that AAPL was experiencing on Wednesday, hinted at some movement in the stock in the near future. As an example, the implied volatility on AAPL earlier in the week was in the low 20’s. It is currently at 31. This spike in implied volatility indicated some uncertainty in the stock price, and that is exactly what we got.
The stock dropped rapidly on Wednesday, falling from $526 to as low as $486 the next morning. This $40 drop caught many investors off guard, and I am sure triggered more than one stop loss. The stock settled at $502, up $9 for the week. So, what caused the move? In the end, nobody really knows. Rumors of a stock split, rumors of a dividend, rumors of a re-balancing in the QQQ, and profit taking are all potential reasons. Regardless of the reasons, the opportunity that was created was enormous, not just in the equity itself but also in AAPL’s options.
From a multi need standpoint, the options market is a great place to trade. What do I mean by multi need? Some traders need protection or insurance in their investing. Some feel the need for leverage and high powered results. Some feel the need for consistency. The options tools give you all of those if you understand them correctly.
Let me give you an example. Last week when AAPL was hitting bottom, the fundamental investor in me said, “I think the sell-off in the stock is overdone and it is going to bounce. When it bounces, I expect the stock will move higher quickly as the sellers jump back in quickly to try to get back into this one. So, I am going to use options for leverage to take advantage of a quick pop. “ On Thursday early afternoon, AAPL showed some signs of life, so I bought Jul 500 call options for $39.20. The stock then rose out of the ashes and I sold them 58 minutes later for $41.87. I typically do not day trade, but when I am up 6.8% in less than an hour it doesn’t hurt to close. There is that age-old adage that goes something like, “a man will never go broke taking a profit.” In comparison, the stock’s move in that hour went from $494 to $500 or 1.2%. This is just one example of how options can be used to outperform the move in an underlying security.
When Facebook finally goes public, I will be there trading options around it. Options allow you to profit from potential IPO’s like Facebook, but do so without risking the drastic moves that many remember from the first round of Dot-com IPO bubbles. I believe Facebook won’t be just another Dot-Com.
If there were options on Jeremy Lin, I would be buying calls. Unfortunately for me there aren’t, so I may have to settle for MSG.