Great Example of a Short Call Spread on Apple Inc. (AAPL)

09/24/2009 12:01 am EST

Focus: OPTIONS

Elizabeth Harrow

Financial Analyst, Schaeffer's Investment Research, Inc.

Apple Inc. (AAPL) appears to have been targeted on Monday by a short call spread. Shortly after the open, two blocks totaling 1,556 contracts changed hands on AAPL's October 180 call, with the transactions taking place close to the bid price. Simultaneously, two symmetrical blocks of 1,556 contracts crossed the tape on the stock's October 185 call, this time with a bias toward the ask price.

AAPL price chartIn other words, it appears that the trader in this scenario was selling the October 180 calls and buying the October 185 calls to build a credit spread. This is generally a neutral to bearish strategy, with the speculator wagering that both options will expire worthless, allowing him or her to retain the initial credit received as profit.

However, those sold 180 calls are already in the money, with AAPL trading near $183. This means the trader collected a healthy premium for selling the calls (about $8.85 per contract), but it also raises the possibility that the calls will be assigned. With so much time value left in October-dated options, it's possible that this speculator expects AAPL to beat a path below $180 before buyers get the itch to exercise.

If the stock maintains its positive momentum, though, such a pullback is unlikely during the short term. AAPL has rallied nearly 117% year to date, and it's currently perched above support from its ten- and 32-day moving averages.

By Elizabeth Harrow of Schaeffer’s Trading Floor Blog

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