Apple is a perfect pullback play because of the lower implied volatility and higher interest rates.
Stocks seem to be hitting a major barrier. The S&P 500 is still at a barrier of $4200.
Apple, the largest market cap, is no exception. Apple stock is still where it was a year earlier. The question is whether it will go even higher.
Here's a quick comparison between then (April 2002), and now, in Apple. Why you might want to look at a cheap put purchase now.
In the last 12 months, the Fed has dramatically increased rates. The Fed Funds rate is currently between 4.75% and 5%. Last April, the Fed Funds Rate was below 1%.
The yield on the 10-year Treasury is much higher than it was a year earlier. The yield was under 2.75 percent. It is now over 3.5%. It is clear that interest rates have risen significantly. Apple and other stocks don't seem concerned.
The magnitude of the increase in interest rate should cause valuation metrics like Price/Earnings and Price/Sales to contract. The AAPL P/E is now up a point, from 27 to 28, instead. Apple's P/S ratio is almost the same as a year earlier, at just below 7.
APPL is now back at similar multiples which have previously signaled a top. Last August, P/E peaked at 28. This was just before a brutal pullback.
As the Fed has indicated that it will not be cutting rates any time soon, a further expansion of valuation multiples from their current lofty level is unlikely. The AAPL share price will be adversely affected by this in the coming months. It is also interesting to note the fact that the current rally's magnitude is almost identical to that of the previous rally, which ended in August.
Implied Volatility IV
Apple options have seen a significant drop in implied volatility compared to a year earlier. The implied volatility of July $165 put options at the money was just below 33. Similar at-the money puts are now trading with an IV of approximately 25. The 25% decrease in IV is a sign that options are cheaper today than they were 12 months ago (both calls and put).
How much cheaper is it? This table shows you the total cost.
Now and Then
The July $165 put now has 91 days left until expiration. The same puts were available with 85 DTE. AAPL closed today at $165.02. Apple then closed at $166.42. Now, the AAPL July 165 puts are being priced at $7.45. Then, the AAPL $165 July puts were priced $8.95. Now IV is 24.97. Then, IV was 32.76. The big drop in implied volatility (23.78%), makes what would have been a bit more expensive based on higher DTE and a lower stock price, a lot less expensive based upon a much lower IV.
Traders and investors who are looking to short stocks such as Apple should consider the advantages of purchasing cheap puts. It makes more sense to define the risk and lower the cost of playing for a pullback now than at any other time in the last 12 months.
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Shares closed Friday at $412.20, an increase of $0.32 (+0.08%). The S&P 500 benchmark index has risen by % during the same time period, while the shares have gained 8.20%.
Tim Biggam is the author.
Tim worked as Chief Options Strategy at Man Securities Chicago for 13 years, as Lead Options Strategist with ThinkorSwim for 4 years and as Market Maker at First Options Chicago for 3 years. He is a regular contributor to Bloomberg TV, and TD Ameritrade Network's "Morning Trade Live". He is passionate about making the complicated world of options easier to understand and more useful for the average trader. Tim is the editor for the newsletter. Find out more about Tim and his background. Also, links to some of his recent articles.