MorningWord 6/18/13: Yesterday shortly after 1pm our Twitter-feed lit up like a Christmas tree after I reported the following trade in AAPL:
— Dan Nathan (@RiskReversal) June 17, 2013
I think it is interesting to note the interactions that we received after the initial tweet with questions ranging from:
- how do you know it was bought?
- how do you know it was opening?
- was it a hedge against a short?
- why would anyone buy this option so far out of the money with so little time to expiration?
- what does this guy know, July expiration catches no identifiable catalyst as earnings likely to fall in August expiration?
My quick take, and this is purely anecdotal, is that the level of interest from our little Twitter-sphere tells me that interest in AAPL is alive and well, and for those who suggest that the fever has broken as it relates to the fascination around the company and the stock are probably mistaken.
So let’s tackle the questions. I sit on an options trading desk where I have access to very quick information abut large block trades as they are crossed on the major options exchanges (AMEX, PHLX, CBOE & PCOAST). When trades are crossed on an exchange (and not over the counter) there is a certain amount of information that the trader looking to cross the order is required to provide to the exchange. This is how for the most part I can get a sense for bought or sold, opening or closing.
As far as having a clue as to the intent of the trade, your guess is as good as mine unless you have spoken to the trader that executed the trade, and even then you are not likely to get the straight scoop as most traders who are trading large blocks like this one in a high profile name usually prefer to keep their intentions close to the vest. So here are my 2 main scenarios from someone buying 10,000 of the AAPL July 470 calls for $2.26, committing $2.260,000 million to an option that will expire worthless on July 20th (a little more than a month):
First, this could be an outright bullish bet as the trader is basically targeting the May high, which should serve as a decent target on the least bit of good news.
Another point I would make is that 30 day implied volatility has gotten totally destroyed lately as the stock has stabilized at its 50 day moving average, and importantly, options expiring 30 days out are not likely to fall in July expiration. The options the trader bought are cheap on a vol basis. The chart below shows 30 day at the money implied vol (blue line) and 30 day realized vol (white line) trading at 9 month lows, oddly, at levels not seen since the stock was $25o higher.
Secondly, the trade could have been a disaster hedge against a short position of possibly 1 million shares, but this seems less likely that the trader would be willing to risk almost $40 million dollars in losses on July expiration for any real protection. Obviously as the stock went up the options would pick up in value, but remember these options only have about a 15 delta, meaning that for every dollar the stock rises the options will gain .15 cents in value (this will obviously increase as the stock climbs closer to the strike). But the main point is that the stock will need to make a fairly large (~9%) move for these options not to expire worthless.
So to sum up, AAPL fever is still alive and well. And that’s a good thing for traders as my sense is the stock is not likely to stay pinned at its 50 day moving avg, down ~18.8%, for long. Traders are starting to look for second half catalysts from product launches to earnings events and some see a brighter future. But the debate still rages on as to whether or not innovation is alive and well in Cupertino, California, and if the stock’s reaction since last weeks’ WWDC is any guide, investors remain cautious as opposed to the technorati that walked away in their usual amazed fashion.
While the trade that we discussed above is not exactly a massive bet from a financial standpoint, it would represent a MASSIVE notional bet if the stock was at or above $470 btwn now and July expiration, which is why I called it a “monster” trade. Most options market observers have not become accustomed to seeing 10,000 lots of AAPL options trading untied which is why this one caught my attention.
So this will be a fun parlor game, to see just how smart this guy is and what he knows or doesn’t know about AAPL’s near future. Obviously we have no clue to his intentions, but I would offer one last point – I don’t think it makes a ton of sense to be following a large player into a trade like this for the very reason that your prerogatives are likely VERY different than his. There are lots of traders who like to follow unusual options activity. That is not our bag, and unless you have good information to the how and why, you are pretty much throwing a dart at a board.