Apple: When Speculators Rule Over Investors (AAPL)

Apple Inc. (NASDAQ: AAPL) closed at another new all-time high today of $211.61 and $213.95 on an intra-day basis.    What is actually far more important than reports of a note from Broadpoint AmTech lifting its price target to $260.00 for 2010 is that the intra-day highs above $210.00 this morning were better than just 52-week highs.  What is getting interesting here is that investors and speculators have begun a major migration into stock options in Apple rather than the common stock of Apple.  Speculators are trading more and more front-month options to get exposure to the share price rather than buying or selling the shares outright. This is easy to prove because all the activity is in the front-month contract.

Sure, FEB-2010 and later contract expiration dates were active considering the moves, but the real action is in the front month JAN-2010 CALL and PUT contracts.  None of these strike prices was even dictated by any single block of contracts traded.  It was mainly just solid buying of contracts in various block sizes both small and large(r).  This is almost always indicative of retail and active traders looking for exposure rather than making long-term bets on the share price.

The options trading was through the roof today for JAN-2010 CALLS & PUTS listed below with contract volume and open interest:

CALL$    Volume    OpInt
$160.00    1,141    13,570
$165.00    185    13,260
$170.00    1,121    20,068
$175.00    404    6,233
$180.00    856    15,305
$185.00    2,699    17,720
$190.00    6,356    28,685
$195.00    4,671    32,814
$200.00    14,803    59,114
$210.00    34,383    61,780
$220.00    39,611    57,537
$230.00    22,341    30,696
$240.00    5,143    31,691
$250.00    2,140    38,046
$260.00    1,036    12,455
$270.00    1,375    5,533
$280.00    1,855    3,930
TOTAL:    140,120    448,437

PUT$    Volume    OpInt
$160.00    932    12,633
$165.00    815    8,781
$170.00    1,778    15,187
$175.00    4,392    26,024
$180.00    3,772    37,786
$185.00    6,707    39,711
$190.00    9,214    43,137
$195.00    8,248    20,914
$200.00    15,376    29,403
$210.00    12,833    13,574
$220.00    3,450    3,126
$230.00    669    1,593
TOTAL:    68,186    251,869

Apple traded over 23 million shares today if you include the after-hours session.  Average volume is around 18 million shares.  This was also the most active trading day in the stock since the days during the December 4 to December 9 period when Apple was trying to figure out if was going to see a major technical break-down or a snap-back recovery.

But this stock options trading is over the top.  The 140,000+ contracts in the front month CALLS listed at only these strike prices already noted is equal to 14 million shares on a fully leveraged basis.  That 448,000+ listed in the open interest is indicative of 44.8 million shares on a fully leveraged basis.  The PUTS are indicative of bets on over 6.8 million shares today and over 25 million shares in the open interest on a fully leveraged basis.

It is not possible to know all the set-ups in these, and it is even more impossible to just add up the volume today to get a figure of bets on over 20 million shares traded and almost 70 million combined in the open interest.  Sure, many are one-way directional speculative bets.  But many are also volatility trades, protection for gains, speculative upside bets, covered call writing and more.  Either way, this is still getting into overly speculative ground on stock options versus the stock trading.

This won’t alone mark a top in the share price, at least not knowingly.  A top will have to be marked by either excessive valuations or by momentum investors carrying a trend so far that the fundamentals cannot keep up.  So far, Apple has always been able to keep and over-delivering report every quarter.  And now its chart is back to strong enough that many technicians will be tracking support and resistance pivots on every single day.  Apple may be keeping its share price high with no stock splits to keep the speculators from running a share price too much in either direction.  The problem with options volume this high is that it acts as shadow trading and as much in theory as shadow volatility.

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JON C. OGG