After the close today Apple will release its much anticipated earnings. We are playing the announcement via the weekly options expiring tomorrow. Our trade it to buy the 635/645/655 call butterfly for $1.00 and also buy the 585/575/565 put butterfly for $0.75. Our net cost and maximum risk in this trade is $1.75, and we can make up to $8.25 if Apple expires at 575 or 645. On average Apple moves 6.3% after earnings, so we designed this trade to profit from another move of that magnitude and chose strikes near levels we believe Apple is likely to end up near. Our experience tells us that even if Apple only gaps up or down about 4% tomorrow morning we are likely to be able to unwind this trade for a small profit. We like the risk/reward profile of this trade see a good chance it is profitable come tomorrow morning.
The CBOE Correlation Index (KCJ) is close to the lowest level we have seen since it was first listed in 2007. The KCJ measures the implied movement of the S&P 500 components options, compared to the implied movement of the S&P 500 index options. Simply put, the higher the number, the more likely all stocks are going to move together. Conversely, a low number will be characterized by sector rotation, and flat markets; one sector moves higher, another moves lower. (Source: Access Hollywood) Correlation, for lack of a better term, is correlated with volatility. Not surprisingly, 30-day S&P 500 historical volatility is near the low level of 6.5%. Currently at 33.5, KCJ is sitting close to rock bottom, lower than where it was in 2007, (but not lower than where Lindsay Lohan was in 2007). So far this year, the market has been able to grind higher, characterized by leadership in FANG(Facebook Apple/Amazon, Netflix, Google) and sector rotation. A...
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