AAPL: The largest single stock options trades today were in Apple:[caption id="attachment_68228" align="aligncenter" width="600"] From Bloomberg[/caption]
While the size of these trades raised eye-brows it’s important to note that these trades were delta neutral (non-directional) and were likely associated with an Accelerated Share Repurchases (ASRs), which we have discussed before in the stock after seeing similar trading activity. Today’s trades are call reversal conversions, where the buyer executes a risk-less transaction buying long stock and delta neutral versus a long in-the-money put (if long 100 puts then long 10,000 shares of stock) and a short out-of-the-money call (Long stock, short synthetic stock). This acts like a short forward contract on that stock (read here for more on Forward Contracts). As we’ve said in the past, this could be a bank locking in funding for the long stock position at a cheaper rate than the bank charged a client for funding a similar position. The client? Probably Apple itself.
The bank has entered into an ASR program with AAPL whereby the bank(s) have committed to delivering a specified amount of shares to the company at a certain price in the near future. This reversal/conversion is a little trick that can make it more profitable for the bank while doing so.
Prior to today’s bounce, AAPL has declined about 12% from its pre-earnings highs, and found some technical support in and around $105, an important level over the last year or so:[caption id="attachment_68229" align="aligncenter" width="600"] From Bloomberg[/caption]
Historically Apple has timed these ASRs to those types of moves in the stock where they feel like they are being undervalued by the market. The stock has reacted well during the periods.
XOP – The largest trade in contract terms today in the options pits was an opening purchase of 93,000 of the XOP (S&P Oil & Gas etf) Dec 33 puts for 42 cents ($3.9 million in premium), when the etf was trading $38.20. These puts break-even down about 15% from the trading level at $32.58.
While oil stocks have shown very good relative strength to crude since its October highs, the realtively equal weighted etf has been unable to breakout to a new one year range:[caption id="attachment_68218" align="aligncenter" width="600"] XOP 1yr chart from Bloomberg[/caption]
Taking a slightly longer term view, $40 appears to be formidable technical resistance, with little overhead resitance above until $50:[caption id="attachment_68219" align="aligncenter" width="600"] XOP 5yr chart from Bloomberg[/caption]
Last week we took a look at the XLE, the S&P Energy Select etf (XLE – Oil Change). The major difference between the XOP and the XLE is the concentration of the etfs, XOM, CVX & SLB make up 40% of the XLE.