AAPL options volume exploded yesterday to a total of 2.3 million contracts, on a day that saw the stock decline 4.2%, closing a touch off of the morning lows. The one day decline is significant, not just in market cap terms, (AAPL lost more than $25 billion in value), but the from a momentum standpoint the breakdown wipes out 2 weeks of very positive performance, placing the stock below the physiologically important $100 level which represented a healthy breakout of the recent high, and the all time high made back in September 2012:
Heading into yesterday, AAPL stock was up more than 27% in 2014, dramatically outperforming the SPX and the NDX, which were up 8.5% and 15% respectively. This is important as AAPL is the single largest component of the SPX at 3.5% and 13% of the NDX! While the stock clearly bifurcated from the broad market in 2013 (lost value while the index gained) I would suspect that a period of underperformance for AAPL from its own all time highs and the broad market highs might have a different affect from here on out.
Yesterday’s momentum break is sure to draw out the ol “double toppers”, those technicians who will suggest that AAPL’s failure at the prior high could signify an important sentiment shift, at least from a technical perspective:
Whats interesting about yesterday’s price action was that despite the stock’s decline, resulting from little stock specific news, call volume nearly doubled that of puts. For a stock like AAPL with overwhelmingly positive sentiment, and such huge ytd gains one would think that investors would be looking to protect gains instead of buying the very first dip in months. Four of the five most active options were in the weekly calls, that expire tomorrow, with between 70,000 and 85,000 of the Sept 5th 100,101,102 & 103 calls trading, with the most active put strike 75,000 of the Sept 5th 99 puts.
The chart below shows the massive ramp in implied volatility (the price of options) for near dated options, that is obviously the direct result of what was overwhelming buy interest for those using the stock’s volatility to play for a snapback:
The one year chart of AAPL’s 30 day at the money IV shows anticipation building into next week’s Sept 9th iPhone launch event, with options prices reaching that of the normal pre-earnings levels:
And lastly, there was one trade that stuck out (the largest trade of the day), a bullish trade shortly after the market opened when the stock was $100.70, a buyer paid .22 for 15,000 by 30,000 of the Sept 12th weekly 104/107 1×2 call spreads to open. Breaking this trade down, the trader bought 15,000 of the Sept 12th weekly 104 calls for 1.14, and sold twice the amount (30,000) of the Sept 12th 107 calls at .46 each, or a total of .92. This trade breaks-even at $104.22 with potential max gain of 2.78 at $107 on next Friday’s close. Its important to note, that this trade is NOT a defined bet, as the trader only risks .22 between current levels and $104.22, but has the risk of being short the stock above 109.78. This trader was clearly looking to take advantage of the elevated options prices to help offset what should be very rapid decay in the Sept 12th 104 calls that will occur after next week’s event.
From a sentiment standpoint, it will be interesting to track today’s options activity, if in fact the stock were to continue to sell off, if the options flow continues to be overwhelmingly bullish, or if a second straight day of selling with implied vol exploding turns the tide and causes investors to look for protection.
{FOR MORE DETAIL ON WHAT I AM LOOKING FOR INTO NEXT WEEK’S MEDIA EVENT READ: Name That Trade – $AAPL: iWatching Apple}