The motivation to keep Apple shares down until January 19

Tue, Jan 15, 2013

Finance, News

With all of the controversy and speculation surrounding Apple’s cutback in iPhone 5 display orders, some skeptics are alleging that this is simply nothing more than a classic “lets manipulate Apple’s share price before earnings” type of game.

To that end, John Gruber directs us to this interesting piece from Joe Springer back in November.

So here is our logic to being patient. It is threefold:

  1. Apple had an enormous amount of call options speculation related to its Summer surge
  2. A huge share of this was calls with a strike of around the current price of $550 and higher that expire January 19 2013
  3. The institutional money managers that wrote those call options and bought common stock to cover will make a lot of money if a) those options expire worthless, and then b) Apple runs after that expiration date

What kind of money are we talking? Let’s use the more than 60,000 calls with a $600 strike price. If Apple goes to $700 before January 19, then those options have an intrinsic value of:

60,000 (call options) X 100 (shares per option) X $100 (intrinsic value per share) = $600,000,000

Six hundred million dollars not in the institutional call writers’ pockets. Whereas, if Apple stays put, then runs to $700 after the expiration date, the call writers get the capital gain from the common stock they covered with, AND the entire amount for which they sold the option. And this is only one strike price we calculated – together this is billions of dollars for a two month delay in an Apple surge.

So basically there is an incentive for the forces that be to keep shares of Apple down as much as possible in the leadup to January 19.

Food for thought.

And whadya know, shares of Apple are now trading in the $485 range. As it stands now, Apple has  P/E ratio of 11.1. Incredible.



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