What the AAPL surface was telling me into earnings
AAPL has been on fire. The call wall had shifted up to 350, which tells you positioning has moved with the rally.
But the surface wasn't fully backing the move.
Vol caught an initial bid on the rally and then plateaued. Skew didn't follow the price higher. Both of those readings tell you the options market wasn't as convinced for further upside.
The setup into earnings.
The market had priced in the good news. The rally is in the tape. The call wall is at 350. Everyone bullish already has the exposure. What that leaves is room for disappointment.
The trade I flagged to the community was a put calendar.
Sell the front expiry that contains the earnings premium, buy the back expiry behind it. Low conviction way to fade a name that looks like it needs a pullback.
The reason it's cheap here is that the forward vol is much lower because it factors in the vol reset after earnings.
The stock is down 7% overnight so a bit more than the implied move, which has been the case for a lot of names this earnings season.
Reading whether the surface is confirming or leaning against a price move is where the real edge on earnings positioning sits.
Want to learn more about the framework I built across 20 years on bank options desks?
The bigger point on AAPL right now.
A rally that outpaces its own vol surface tends to have a soft ceiling. The move is being carried by spot momentum rather than by any conviction repricing in options. Earnings was the catalyst for mean reversion.
The setup lets you buy asymmetric downside protection cheaply, if you use the cheap forward vol and fade the earnings move. If the stock doesn't more than implied it should work well and that tends to be the case most of the time. In a massive move, owning the expensive outright options will pay out, but the odds tend to be against you.
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Imran
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