Contrarian traders, by nature, tend to fade the prevailing market norm. According to some, when the options market gets too bearish one should get bullish. This is in line with the old theory that the market tends to punish the greatest amount of people possible. When options gets overly bearish, the relative price of an ‘out of the money' (OTM) put is pumped up compared to a similar probability OTM call: the skew is increased. Perhaps the most interesting underlying optionable asset is
Apple. Shares have slid over 25 percent from their all-time high, and questions over Apple's valuation is also getting heated. Moreover, Apple options volume surges before earnings; thus, Apple is a perfect candidate to test the idea of options skew.In order to test options market sentiment, Benzinga went back eight earnings reports and gathered data on weekly 34 delta Apple options. The 34 delta options were chosen because prices between the two options represent a one standard deviation range -- a 68 percent chance Apple expires between the two strikes. If a 34 delta option was not listed, the closest option to 34 deltas was chosen. These two options have a similar probability of ...
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