The relentless bullish vortex known as Apple Inc. achieved an impressive benchmark on Monday by finally climbing atop the totem pole of valuation. With yesterday’s rally its market cap lifted over $661 billion thereby overcoming the previous record holder Microsoft, which traded at a $618.9 billion valuation in 1999.
But, before all you Apple zealots don your party hats and pull out the pom-poms, keep in mind this is a record that deserves a large asterisk since the comparison doesn’t consider inflation. As reported by Tech Crunch, with inflation adjusted numbers Microsoft is actually the king of the hill with its value rising to $856 billion in 1999.
Valuation aside, Apple’s implied volatility was also on the move in yesterday’s historic session. The Apple VIX (VXAPL) was up over 30% at its intraday high revealing a strong surge in demand for option contracts. The action in the derivatives market reveals two lessons of note.
1. Implied volatility doesn’t always have a negative correlation to a stock’s price.
Typically a fall in a stock’s price will be accompanied by a rise in implied volatility as worried traders willingly bid-up option prices. The widespread belief that volatility and stock price are inversely correlated is perpetuated by everyone’s fixation with the CBOE Volatility Index (VIX). Anyone who has watched the VIX for longer than a nanosecond will attest that it tends to zig when the market zags.
Yet, yesterday’s liftoff in the Apple VIX came on the heels of a rise in the stock price. Such a curious phenomenon isn’t so curious when you realize implied volatility is merely driven by supply and demand. If traders perceive Apple is about to get “jiggy wit it” to the upside they’ll happily bid-up options to exploit the expected increase in realized volatility.
2. Buying implied volatility when the AAPL VIX falls into the low 20s continues to be a profitable idea.
Option traders know the whole “buy low, sell high” mantra not only applies to a stock price, but also implied volatility. Given its mean reverting tendencies implied volatility is easiest to predict at extremes. Since its launch in 2010, VXAPL has oscillated between the low 20s and high 40s. The fact that we’ve rallied so strongly off of the lower end of the range proves once again that buying volatility in some fashion when VXAPL falls to the low 20s can be a lucrative proposition.