The Apple VIX and Some Applications

Thu, Dec 13, 2012 | Jared Woodard

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I got the chance to chat yesterday with Phil Pearlman of Stocktwits for Reuters TV. We were talking about VXAPL, the CBOE’s application of the popular VIX methodology to AAPL options.

Here are some additional points building on the ideas we covered there.

First, while VXAPL moves broadly in sync with equity index implied volatility, the idiosyncratic moves in the stock cause VXAPL to diverge at times. That makes it worth watching: this and the other volatility indexes aren’t just duplicative of VIX, even if they all follow similar trends from a high-level view.

Nasdaq, S&P 500, & Apple volatility indexes. Source: CBOE, Condor Options

Second, even though Apple is a huge driver of Nasdaq 100 returns, VXAPL isn’t always that tightly correlated to VXN. This matters because a natural thought, at least to me, was that it might be worth trying to trade a view you have about AAPL or VXAPL using the Nasdaq 100 volatility futures. The reason that sort of trade would be attractive is that, if you have a view about the likely path of implied volatility, trading volatility futures provides that exposure without locking you into a strike-specific set of expectations. But as the attached chart suggests, given the potential for low correlation between the two volatility indexes at times, I think a straightforward trade in AAPL options will usually make more sense.

VIX and VXN 1M Rolling VXAPL Correlation. Source: CBOE, Condor Options

Finally, in the video I mentioned the idea of using moving averages to smooth out moves in VXAPL, which can be pretty noisy on its own.

AAPL and VXAPL Moving Average Strategy returns, 2011-2012. Source: CBOE, Condor Options

On a whim, I looked at the equity curve (above) for a strategy following a very simple rule set: buy and hold AAPL, but go to cash when the 15-day moving average of VXAPL at yesterday’s close is greater than the 30-day moving average. Since the strategy is out of the market so often, we use 2x leverage on the long position. This isn’t a strategy I wouldn’t necessarily trade as-is and there is some obvious room for improvement, but I like this as an example of how equity investors can use information from options markets to inform their trading, even if they don’t execute orders in the options themselves.


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Jared Woodard specializes in trading volatility as an asset class. With over a decade of experience trading options and other volatility products ... Read More

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