The Options Market is Controlling AAPL

Written by on January 19, 2013 in Investing, Stock Talk with 0 Comments

Apple’s share price has been in a funk since hitting its all-time high in September of $705. To those that still believe in Apple’s fundamental story, Friday’s close of $500.31 seemed like one more smack in the face. The Blogosphere immediately lit up on the close -  “Apple’s $500 Close: Its Not Manipulation” by Rocco Pendola of The Street Dot Com.  Most of the comments disagreed with the authors premise.  Twitter was buzzing as well.

There is this natural phenomenon on option expiration (OpEx) day of stock prices moving towards round numbers as option traders square their books by buying or selling shares. This is known as pinning  and is often a source of great debate. Some say its manipulation and others argue the contrary.  Since this is a well know behavior and the SEC hasn’t ruled against it, let’s say its not manipulation.

However, that doesn’t say that there isn’t persuasion before OpEx to drive stock prices to a certain levels on expiration.  The chart below (from applpain.com) shows how many thousands of call options above $500 and put options below $500 went up in smoke (expired worthless) on Friday.

Needless to say, there is enough money on the line to assume that there is some persuasion taking place.  This week was a perfect example.  Travis Lewis, applpain.com, understands the options market and how it specifically applies to Apple better than anyone that I have come across.  He made the following comment to Rocco’s article:

Agree 1,000% $500.00 close was market mechanics. What was not market mechanics was ‘why’ did it drop from $520 from last Fridays close? Why did an old WSJ article reapear Sunday night?

Jim Cramer of CNBC is not shy about discussing how he and his hedge fund buddies made money feeding stories to the media to influence stock prices (video).  Apple’s move from $520 to $500 was text book.

Now one day or week doesn’t make the Options Market Apple’s daddy, but how about an entire year? In 2012, Apple returned 31% vs. 13.5% for the S&P 500. Logic would suggest that Apple would be up slightly more or days when the S&P was up and down slightly less on days when the S&P was down. Apple’s best days were not on the market’s best days – but the opposite (Bespoke, AaplPain).  Thursday and Friday’s were Apple’s worst days – leading up to weekly OpEx (every Friday). This has been going on since the advent of weekly options.

In my opinion, there is enough evidence to suggest that the Options Market has more than its fair share of influence of the direction of Apple’s stock making it AAPL’s daddy.

 

Disclosure:  Long Apple.

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