/Apple%20Products.jpg)
Today a Barchart report shows there is unusual put options activity in Apple Inc. (AAPL) stock. This is for deep out-of-the-money (OTM) puts, i.e., strike prices well below today's price. The strike price is for a nearby expiry period. This could likely be from a short-seller of the puts, highlighting the underlying value of AAPL stock value here.
The Barchart Unusual Stock Options Activity Report today shows that over 22,000 contracts traded in the $155 strike price put option expiring May 10, which is one month away. Since AAPL stock is trading at $168.03, this strike price is $13.03 below the spot price, or 7.75% out-of-the-money.
This means that the buyer of the puts has to hope that AAPL stock not only falls 7.75%, but, since the premium asked is $1.04, to make a profit, it would have to decline to $153.96. So, the breakeven price in 30 days is over 8.37% lower than today's price. They essentially must believe that AAPL will tank very hard.
However, it's much more likely that the initiating transaction was done by short-sellers of these puts. They gain an immediate income of $1.01 on the bid side. That works out to a put yield of $1.01/$155, or 0.65%.
Moreover, since the investor receives the income immediately, their breakeven level is $153.99 per share (i.e., $155-$1.01). AAPL would have to fall by over $14.01 on or before May 10.
Covering Before the Expiration
In addition, since this is a high put option premium and since during the last 30 days of an option the extrinsic value tends to deteriorate rapidly, the short seller can cover any time. They don't have to wait until the final day of expiration.
For example, if the stock stays where it is in two weeks, the put premium would likely have fallen to 40 to 50 cents per contract. That would give the short seller a 50% profit.
Here is how that works. The short seller of these puts would have to first secure $15,500 in cash and/or margin for every contract shorted. So, for 1,000 puts they would need to secure $15.5 million. Then after entering an order to “Sell to Open” 1,000 contracts, the account would then immediately receive $100 for every contract sold short, or $100,000.
Then, if the puts fall to $0.50 per contract, they could cover by entering an order to “Buy to Close” 1,000 contracts by paying $50,000. The net result is a return of $50K on an investment of $15.5 million or 0.32%.
Why This Looks Attractive
Apple stock has drifted down from its recent March 28 high of $178.67, a drop of 6.0%. It's also off 13.9% from its Q1 high of $195.18 on Jan. 23, 2024.
However, analysts still have high price targets for the stock. Yahoo! Finance, which uses Refinitiv data, says the average price target of 39 analysts is $200.13 per share. That is an upside of over 19% from today.
Even an AnaChart price target average of 33 analysts shows $180.21 per share. That represents an upside of 7% from here.
The bottom line is that most analysts believe the stock looks cheap here. That is likely why some institutional traders have shorted out-of-the-money put options with breakeven levels over 8% below today's price. They believe it's likely that the stock won't deteriorate too much further from here.
As a result, it looks like this could be a way for existing shareholders, who already own the stock, can make extra income by shorting these deep OTM puts.
On the date of publication, Mark R. Hake, CFA did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
