12-8-13 AAPL Option trading opportunity

I Notice a new setup for option strategy.

When an option’s implied volatility is too excessive, way exceed its realised / expected volatility,
there exist a volatility spread between expected and implied volatility. We may trade the volatility arbitrage
and gain from it.

Example :
On 12/8/13, AAPL shares open with a gap down, to $885 area. $885 PUT option suddenly become In The Money,
and we can expect the $885 strike PUT option price to spike up.
Its 17/8/13 option, thus only 5 days to expiry, and ITM Theta is very strong, almost 0.5. This ensures time decay is at its maximum to favor us.

Thus the option price did spike to $9, from $6, and at that time, its implied volatility is very high, much higher than its realised volatility. There exist a temporary volatility spread for us to arbitrage on it.

Thus we may short the AAPL option @ $9. True enough, soon it retrace back to $6 in 2 hours time, giving us $3 easy profit.

This is called volatility arbitrage I learnt from the book from Euan Sinclair, and application of the theory.

Note that we may apply our +3 and -3 SD grid onto the prices of AAPL and its option, when AAPL reach -3SD, and AAPL PUT option reaches +3 SD, we see an arbitrage opportunity as well, in another angle. Thus both ways, we can see clearly its a good opportunity to short AAPL PUT option with little risk (95% confidence interval).

AAPL_option

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