The Friday Rush on Apple Options

08/08/2011 11:35 am EST

Focus: OPTIONS

Andrea Kramer

Associate Editor, Schaeffer's Investment Research, Inc.

Not even Apple (AAPL) was safe from the carnage last week, and weekly option traders piled into puts with just hours to go until expiration on Friday in order to play very short-term weakness in the shares.

Tech titan Apple Inc. (AAPL) has suffered along with the broader equities market last week, with the iPhone maker poised for a weekly drop of about 4.4%. However, even amid the Wall Street uncertainty of late—as evidenced by the major market indexes’ post-payrolls roller-coaster ride—weekly option traders rushed to place eleventh-hour bets on AAPL, which is becoming a common Friday occurrence.

For example, by mid-day this past Friday (August 5), intraday volume exceeded put open interest at the stock’s out-of-the-money 355 and 365 weekly strikes, as well as the 370, 375, and 380 strikes. As such, it’s safe to assume that new positions were being added with just a few hours until the short-term options expired.

Among those, the 370- and 375-strike puts garnered the most attention, with roughly 10,300 and 8,800 contracts traded by mid-day, respectively. What’s more, the majority of the puts crossed closer to the ask price, pointing to bearishly biased, buyer-driven volume.

On the flip side, intraday volume surpassed open interest at the in-the-money weekly 365-strike call, as well as the at-the-money 370-strike call. In addition, it appears call traders were adding new positions at the weekly 375, 380, and 385 strikes, which were out of the money.

Most popular has been the weekly 380-strike call, which saw almost 22,800 contracts cross the tape on open interest of fewer than 4,200. However, the majority of the calls traded closer to the bid price, suggesting they were sold. By writing the calls to open, the sellers were expecting AAPL to remain south of the $380 level through the closing bell.

As alluded to earlier, the shares of AAPL have swooned in sympathy with the broader market, settling Thursday beneath their ten- and 20-day moving averages for the first time since June 22. What’s more, the equity has now erased its post-earnings gains and is trading south of the $385 level, which is the site of its bullish gap on July 20.

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From a broader sentiment standpoint, calls have been the clear-cut options of choice, according to the latest data from the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX). In fact, the security sports a ten-day call/put volume ratio of 1.92 on the exchanges, suggesting traders have bought to open almost twice as many calls as puts during the past couple of weeks. What’s more, this ratio registers in the 92nd annual percentile, suggesting bullish betting is approaching a fever pitch on AAPL.

Echoing that trend, the stock’s Schaeffer’s put/call open interest ratio (SOIR) now rests at 0.84, indicating that calls comfortably outnumber puts among options slated to expire within three months. Furthermore, this ratio ranks in the 38th percentile of its annual range, implying that near-term options players are more call-heavy than usual on the smartphone behemoth.

Digging deeper, peak call open interest in the front-month series sits at the 400 strike, with more than 30,000 contracts outstanding. Going forward, this abundance of bullish bets at the round-number strike could actually translate into an options-related roadblock for AAPL in the short term, should the security stage a significant rebound within the next couple of weeks.

By Andrea Kramer, contributor, Schaeffer’s Trading Floor Blog

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