The price for shares of technology icon Apple Inc. (AAPL) has trended strongly higher for the past two months. The company recently received price target upgrades from Bank of America and JPMorgan, with each bank giving Apple a price target of $210. These analyst recommendations, among other news items, has fueled a 20% rise since October. It is impressive enough for any company, let alone the largest company in the world by market cap.
So why is the share price of Apple drawing the attention of chart watchers from Wall Street to r/wallstreetbets? Despite the recent upward price movement, with Apple trading well above its 20-day moving average, option traders appear to be positioning for the stock to fall in the future. The two high-volume, seller-driven days recorded earlier this week certainly seem like evidence that the option traders may be on to something.
Consider that, while the open interest consists of a larger number of call options than puts, the implied volatility built into those prices suggests that traders are selling these options, with a few notable exceptions.
In addition to the price target upgrades, Apple stock could be trending higher for a variety of reasons. As the specter of inflation looms, inventors have been seeking relative safe haven in established large-cap names. This has been illustrated by the recent overall resilience in the Dow Jones Industrial Average compared to the other major indexes. Investors could also be anticipating strong quarterly earnings in the future based on potentially robust holiday sales. But none of these explain why traders are eager to take protective or outright bearish positions.
- Apple stock remains in a relative upward trend after receiving several price target upgrades.
- The open interest appears bullish at first glance but has some glaring bearishness at closer inspection.
- The share price of Apple has recently touched new all-time highs.
- Call options remain priced slightly higher than puts.
- Volatility-based support and resistance levels allow for a larger move to the downside.
Analysis of recent option activity combined with technical analysis of share price movement can help chart watchers gain valuable insight into the overall sentiment toward Apple stock. The chart below depicts the recent price action for the Apple share price as of Thursday, Dec. 16.
This chart depicts the price action of Apple over the course of the past three months. Each candle represents one trading day. The blue lines are a historical volatility range formed by 20-day Keltner Channel indicators, which depict price levels that represent a multiple of the average true range (ATR) for Apple stock. ATR is a standard tool for illustrating historical volatility over time. The fact that the outer bands in these indicators have been getting wider over the past two months is noteworthy. This implies that, although most investors believe Apple to be worth its sticker price, there is a growing number of traders who disagree.
Starting on the left of the chart, Apple stock trended downward, as illustrated by the red arrow. This helps to highlight the way Apple shifted from trading in an above average range based on historical volatility, crossing below the 20-day moving average and into a below average range.
Traders exhibited a measure of capitulation around Oct. 13. The candle that day represents the end of the recent downward trend and beginning a short upward trend, represented by the green arrow.
After a brief period of consolidation around the 20-day moving average, the share price appeared to triple bottom in mid-November, highlighted by the purple line on this chart. This point served as the beginning of the most recent upward move in the trend. It seems to be following a channel guiding the share price of Apple higher. Despite recent volatility, it remains inside of the channel (highlighted in blue).
Over the past month, the lowest Apple share price was around the $150 level in mid-November, highlighted by the red price balloon. In this same time period, the highest share price for Apple was its most recent all-time high of $182.13 in mid-December. This price is highlighted by the green price balloon. The Apple share price recently closed in the upper third of the volatility range, well above its 20-day moving average.
It's notable that, in this one-month period, the share price for AAPL has increased by 13%, greatly outpacing State Street's S&P 500 Index ETF (SPY) and Invesco's Nasdaq 100 ETF (QQQ), which have fallen 0.3% and 2.7%, respectively. Apple represents the top holding in each of these major ETFs.
The Keltner Channel indicator displays a set of semi-parallel lines based on a 20-day simple moving average and an upper and lower line. Because the upper lines are drawn by adding a multiple of ATR to the average and the lower lines are drawn by subtracting a multiple of ATR from the average price, then this channel indicator makes for an excellent visualization tool when charting historical volatility.
Recent trading volumes of Apple options greatly favor calls over puts. On Thursday, Dec. 16, over 2.2 million calls were traded, compared to 824,000 puts. This is a greater than 2.5-to-1 ratio, and at first glance appears incredibly bullish. However, trading volumes alone only tell one part of the story.
Open interest analysis can provide greater context into the sentiment of option traders. The current open interest for Apple features just under 5.8 million calls against nearly 4.6 million puts. Like recent trading volumes, open interest figures appear bullish at first glance. However, further analysis can provide deeper insights into option trader sentiment.
For each weekly option expiration date before the next monthly expiration date for options, Jan 21, it appears that traders are selling calls at or near the money. This is because open interest is rising, while implied volatility is falling, which suggests that traders are selling more contracts on short positions in this option. This could mean that option traders view the recent share price increase as unsustainable in the near term and are placing their bets that the stock will experience a short-term pullback.
Interestingly, this does not appear to be the case for options expiring Jan. 21, the next monthly expiration for options. For this expiration date, the single highest open interest is on the $150 call, with 107,000. This is followed closely by the $150 put, with 102,000. The $150 call is significantly in the month, while the $150 put is significantly out of the money.
The next significant strike pertaining to open interest at this expiration is the $200 call, with 101,000. This represents a 16% upside to Apple stock over the next month. A gain of that size would give Apple well over a $3 trillion market cap, and require over $450 billion flowing into Apple stock.
For Jan. 21 expiration, out-of-the-money put pricing declines at a much slower rate than out-of-the-money call pricing. This could be because option traders are more willing to place speculative bets on the Apple share price declining in this time. However, it should be noted that only 14 out-of-the-money strikes are available for call options at time of writing.
Considering at-the-money options and one strike in either direction up and down in the option chain, there are significantly more call options in the open interest for Jan. 21 expiration than puts. The ratio of these calls to puts is nearly 2.5-to-1. This is important to consider, as these strikes perhaps reflect more realistic price action based on current share prices than considering far out-of-the-money options, which may have skewed numbers by speculators and option sellers collecting premium.
The chart below illustrates at-the-money options expiring Jan. 21, highlighted by the solid green and red boxes. The green box represents the pricing that call option sellers are offering, and it implies a 36% probability that Apple shares will close inside this range by expiration. The red box illustrates the pricing for puts, with a 34% chance if prices go lower by expiration.
The transparent green and red boxes represent out-of-the-money calls and puts, specifically the $200 call and $150 put, expiring Jan. 21. The probability percentages are based on the current delta of each individual option. The elevated open interest at these strikes could be speculators who are willing to pay discounted premiums for the potential of large returns.
Over the past month, the Apple share price has risen 13% after receiving several price target upgrades from major banks. Apple stock could also be seen as a relatively safe port in an otherwise volatile storm. However, option traders appear to be taking the opportunity to sell call options in the near term, illustrating a bearish sentiment.