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Option Players Take Sides on Apple Inc. (AAPL)

Apple Inc. speculators are picking up soon-to-expire options

by 5/20/2014 10:57 AM
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Apple Inc. (NASDAQ:AAPL) tagged a new annual high of $607.33 in Monday's trading, and was last seen fractionally higher at $604.97. Against this backdrop, options players are taking sides on the tech titan's short-term trajectory, picking up near-the-money options that expire at Friday's close.

The equity's 30-day at-the-money implied volatility (IV) has edged 1.7% higher to 19.2%, reflecting the growing demand for short-term contracts. In fact, nine of the 10 most active options expire at the end of the week, with speculators taking a shine to the weekly 5/23 605 strike, where roughly 4,700 calls and 3,700 puts have changed hands.

A healthy portion of both the calls and puts traded on the ask side, suggesting they were bought. Meanwhile, IV at the call is up 1.2 percentage points, and volume has surpassed open interest at the put strike -- both signs of freshly minted positions.

The calls traded at a volume-weighted average price (VWAP) of $4.10, making breakeven at Friday's close $609.10 (strike plus VWAP) -- a new annual high. Beyond this marker, the buyers' profit potential is theoretically unlimited, while risk is capped at the initial premium paid, should AAPL settle south of $605 on Friday. Delta on the call stands at 0.49, implying the options have about a 1-in-2 shot of an in-the-money finish at expiration.

Meanwhile, the VWAP of the puts is $4.57, meaning the buyers' profit will accumulate with each step south of $600.43 (strike minus VWAP) AAPL takes by expiration. Again, risk is limited to the initial cash outlay, should the stock close the week atop the strike. Delta on the put rests at negative 0.52, implying about a 52% chance of expiring in the money.

Although the stock's 30-day ATM IV is on the rise, AAPL's short-term options remain relatively cheap. The equity's Schaeffer's Volatility Index (SVI) of 19% stands just 14 percentage points from an annual low, suggesting AAPL's front-month contracts are inexpensive right now, from a volatility perspective.

As alluded to earlier, AAPL scored a new annual high yesterday, with an upgrade helping the shares beyond the round-number $600 threshold. In fact, the stock has outperformed the broader S&P 500 Index (SPX) by 11.5 percentage points during the past two months.

Off the charts, however, bearish bets have been heating up on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), where the stock's 50-day put/call volume ratio of 0.70 stands higher than 89% of all comparable readings from the past year. Meanwhile, traders today will be eyeing rival Microsoft Corporation (NASDAQ:MSFT), amid expectations for the debut of a tablet to compete with the iPad mini.


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