The 14 delta options were chosen because prices between the two options represent a two standard deviation range. A 95% chance AAPL expires between the two strikes. If a 14 delta option was not listed, the closest option to 14 deltas was chosen. These two options have a similar probability of expiring ‘in the money’ (ITM), but they are selling for two different prices. The data is presented in the excel sheet below. The sheet outlines the price of a 14 delta OTM put & call, the quotient of the prices, correlation, and implied volatilities.
Skew could be an indicator for earnings because option prices capture sentiment of traders. Puts that gather a lot of buying interest and therefore higher prices is normally perceived as bearish, right? This is, however, not the case all the time.
The correlation coefficient between the earnings move and skew was .07. This figure is negligible because of its weak nature. A coefficient over plus or minus .80 is considered rather strong. Considering the relationship was near zero, there is not a correlation between AAPL’s earnings move and skew. The results indicate that the efficient-market hypothesis held up in this instance. The efficient-market hypothesis (EMH) is still debated though. One reason is because technical analysis is considered to be weak according to the EMH.
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