How One Option Trader Is Playing Apple (AAPL)

11/19/2010 12:01 am EST


Elizabeth Harrow

Director of Digital Content, Schaeffer's Investment Research, Inc.

By: Elizabeth Harrow

Think a stock is going to stay above a certain level? Can Apple, Inc. (AAPL) maintain its newfound footing above $300? One options trader certainly seems to think so. Earlier today, the iPhone parent was singled out for a neutral-to-bullish spread strategy, with the speculator betting on AAPL to remain at or above $300 through the next several months.

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Specifically, the trader sent several blocks of February 300 puts, totaling about 1,000 contracts, across the tape near the bid price ― suggesting they were most likely purchased. At the same time, several symmetrical blocks of about 1,000 February 290 puts changed hands near the ask price, indicating they were purchased. In other words, this appears to be the initiation of a short put spread, or credit spread, on AAPL.

Since the sold puts are closer to AAPL's current price than the purchased put, this spread was opened for a net credit. This initial credit is the trader's maximum potential profit on the play, and the entire amount can be retained if AAPL settles at or above $300 upon February expiration. Meanwhile, the maximum potential loss is limited to the difference between the two strike prices, less the initial net credit.

Apparently, today's spread speculator is betting that AAPL will continue to capitalize on support from its 10-week moving average ― a key trendline that Sarah Wasserman highlighted in last Wednesday's analysis:

Put players have certainly ramped up their exposure to AAPL lately, as evidenced by the tech issue's 10-day International Securities Exchange (ISE) put/call volume ratio of 0.90, which ranks above 94.7% of all other readings taken during the past year. In other words, speculators on the ISE have seldom initiated bearish bets on AAPL at a faster pace.

In fact, put players have had AAPL on their radar today, with roughly 120,000 of these bearishly oriented options changing hands so far double the tech stock's expected single-session put volume.

AAPL's November 300 put has stolen the show, with over 27,500 contracts traded on this strike the majority of which traded at the ask price, indicating they were likely purchased. With open interest exceeding today's volume, though, it's difficult to determine whether fresh contracts are being added. If these November 300 puts were, in fact, bought to open, then it would appear that some traders are expecting AAPL to sink beneath the $300 level by the end of the week.

In fact, with over 40,000 contracts currently open, the November 300 strike is the undisputed home to peak front-month put open interest. Meanwhile, there are also substantial accumulations of put open interest at the November 280 and 290 strikes. With AAPL trading around $302, all of these puts are currently out of the money.

Despite AAPL's stagnant situation on the charts lately, the stock's overall technical health is looking good. With the equity perched atop strong technical support, and Friday's expiration fast-approaching, the stars could be lining up in AAPL's favor. As expiration nears, an unwinding of out-of-the-money could add fresh buying pressure on the shares, giving AAPL the technical Help! it needs to continue its rally.

Elizabeth Harrow is a contributor to Schaeffer’s Trading Floor Blog.

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