Risk Malaise Alert In Option Market American Electric Power Company Inc Implied Price Swing Hits A Collapsing Low

Risk Malaise Alert in Option Market: American Electric Power Company Inc Implied Price Swing Hits A Collapsing Low

American Electric Power Company Inc (NYSE:AEP) Risk Hits A Collapsing Low

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Risk Malaise Alert -- Not How You Might Think:
Before we dive into any analysis we simply note that American Electric Power Company Inc (NYSE:AEP) risk is actually priced pretty low by the option market as of right now. We'll detail it below -- but that's the lede -- the option market is reflecting a sort of risk malaise, for now, an IV30 of 14.47% versus the IV30 of the S&P 500 at 7.23%. The annual high for American Electric Power Company Inc IV30 is 24.06% -- and we're below that level. The alert here is low vol.

One thing to note beyond the risk malaise alert, which we cover in the article, is that while implied volatility may be low, the real question that needs to be answered for option sellers is not if the implied vol is low, but rather if the realized volatility that is coming in the next 30 days will be lower than the option market is pricing.

To skip ahead of this risk alert and see if buying or selling options has been a winner in American Electric Power Company Inc, you can go here: Getting serious about option trading.

This is a proprietary risk rating and risk alert system that looks forward for the next month -- or really 30 days to be exact -- and that includes weekends. The system is based on multiple interactions of data points, many of which come directly from the option market for American Electric Power Company Inc (NYSE:AEP) . The creator of this model is Capital Market Laboratories (CMLviz.com).
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In the "Why This Matters" section at the end of this article on American Electric Power Company Inc we're going to take a step back and show in great specificity that there is actually a lot less "luck" in successful option trading than many people know. The whole concept of an "option trading expert" is vastly over complicated and we'll talk about how superior returns are earned.

But first, let's turn back to AEP and the company's risk rating:

We also take a peek at the implied vol for the Industrials ETF (XLI), our broad based proxy for AEP.

S&P 500 IV30     7.23%
Nasdaq 100 IV30     11.56%
XLI IV30     9.59%

AEP HV 30     11.85%
AEP Current IV30     14.47%
52 Week Low IV30     11.02%
52 Week High IV30     24.06%

The risk as reflected by the option market has hit a collapsing low relative to the company's past. The option market reflects a 95% confidence interval stock price range of ($69.20, $73.90) within the next 30 calendar days.

While the option market risk rating is on the low side, we note that companies in this situation are still susceptible to sudden stock move risk, it's simply the probability of that large stock move is depressed. Buyers of options and volatility may find these prices more attractive than at other times.

The IV30® is the risk reflected by the option market in the stock price for the next 30 calendar days -- it's forward looking. American Electric Power Company Inc shows an IV30 of 14.5%, which is a collapsing low for the company relative to its past.

The option market for AEP has shown an IV30 annual low of 11.0% and an annual high of 24.1%, meaning that AEP is at the 26% percentile right now. Here's a table of the data before we dig into the risk rating further.

Current IV30    
Low IV30    
High IV30   
14.5% 11.0% 24.1%

The implied stock swing risk from the option market has created a range which is tighter in the next 30 calendar days for American Electric Power Company Inc (NYSE:AEP) than it has been on average for the last year on average.
Further, if we look backwards, the stock has a realized 30-day historical volatility, called the HV30, of 11.85%.

We have an unusual situation now where the IV30 is depressed relative to the past, but even with that risk pricing, the option market reflects the likelihood of a greater stock movement in the next 30-days than the stock has realized in the last 30-days. Let's turn to a chart to see what's going on.
Note how much higher the forward looking stock swing price risk for American Electric Power Company Inc is priced (14.5%) compared to what happened just in the last 30-days (11.9%).

American Electric Power Company Inc Risk Rating
The AEP risk rating is at 1, where the rating goes from one (the lowest risk) to five (the highest risk). The driving factors for the 1 rating are:

The IV30 is below the annual average.
The IV30 is below 30%.
The HV30 is below the annual average.
The HV30 is below 30%.
The IV30 is above the HV30.
The stock has moved just +3.4% over the last 3-months which does indicate some depressed risk.