If you\u2019ve 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.\u00a0 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.\u00a0 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.\u00a0 Hey, in the pro sports world, anything is possible.\u00a0 Maybe even a Cubs world series\u2026<\/p>\n
Crickets\u2026<\/p>\n
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.\u00a0 I am not talking sports anymore. I\u2019m talking about the market.\u00a0 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)\u00a0 The rumors that swirled this week were nothing short of awesome as AAPL stock saw HUGE volatility in the 5 trading sessions.<\/p>\n
On February 10th, AAPL closed the week at $493.\u00a0 This is of course in the middle of a very large bullish move.\u00a0 The bullish sentiment continued the next week with AAPL stock moving up and eventually peaking on Wednesday February 15th, at $526.29.\u00a0 The interesting thing about AAPL\u2019s bullish move was the accompanying increase in implied volatility (IV).<\/p>\n
To put it simply, implied volatility is a measurement of fear.\u00a0 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.\u00a0 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\u2019s.\u00a0 It is currently at 31.\u00a0 This spike in implied volatility indicated some uncertainty in the stock price, and that is exactly what we got.<\/p>\n
The stock dropped rapidly on Wednesday, falling from $526 to as low as $486 the next morning.\u00a0 This $40 drop caught many investors off guard, and I am sure\u00a0triggered more than one stop loss<\/a>.\u00a0 The stock settled at $502, up $9 for the week.\u00a0 So, what caused the move?\u00a0 In the end, nobody really knows.\u00a0 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\u2019s options.<\/p>\n From a multi need standpoint, the options market is a great place to trade.\u00a0 What do I mean by multi need?\u00a0 Some traders need protection or insurance in their investing.\u00a0 Some feel the need for leverage and high powered results.\u00a0 Some feel the need for consistency.\u00a0 The options tools give you all of those if you understand them correctly.<\/p>\n Let me give you an example.\u00a0 Last week when AAPL was hitting bottom, the fundamental investor in me said, \u201cI think the sell-off in the stock is overdone and it is going to bounce.\u00a0 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.\u00a0 So, I am going to use options for leverage to take advantage of a quick pop. \u201c\u00a0 On Thursday early afternoon, AAPL showed some signs of life, so I bought Jul 500 call options for $39.20.\u00a0 The stock then rose out of the ashes and I sold them 58 minutes later for $41.87.\u00a0 I typically do not day trade, but when I am up 6.8% in less than an hour it doesn\u2019t hurt to close.\u00a0 There is that age-old adage that goes something like, \u201ca man will never go broke taking a profit.\u201d\u00a0 In comparison, the stock\u2019s move in that hour went from $494 to $500 or 1.2%.\u00a0 This is just one example of how options can be used to outperform the move in an underlying security.<\/p>\n When Facebook finally goes public, I will be there trading options around it. Options allow you to profit from potential IPO\u2019s like Facebook, but do so without risking the drastic moves that many remember from the first round of Dot-com IPO bubbles. I believe\u00a0Facebook won\u2019t be just another Dot-Com<\/a>.<\/p>\n If there were options on Jeremy Lin, I would be buying calls.\u00a0 Unfortunately for me there aren\u2019t, so I may have to settle for MSG.<\/p>\n Greg Jensen
\nOptionsANIMAL CEO and Founder<\/p>\n