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Apple (AAPL) stock option tranches have had heavy trading volume today. They are all out-of-the-money (OTM) puts that close mostly on Friday. That could be due to both negative and positive sentiment. Nevertheless, AAPL stock still looks undervalued, as I will describe below.
This heavy options activity could be due to the sharp rally that AAPL stock has had in the last few days. It is trading over $217 per share today, up almost 5%. This is after the company's developer conference on June 10 when it introduced its AI or Apple Intelligence product integrations.
AAPL Stock Was Undervalued
Moreover, in the last month the stock has risen about 32% since April 19 when it closed at $165.00. AAPL stock has been on a roll since releasing its quarterly results on May 2. I discussed this in my June 4 Barchart article, “Apple Stock Could Still Be Undervalued Here Based on Its Powerful Free Cash Flow.”
I argued that AAPL stock was worth at least $241.38 per share based on its strong free cash flow (FCF), FCF margins, and stock buybacks. That implies that AAPL stock could still have some upside even after the recent rally.
In effect, the market seems relieved that Apple has plans to rejuvenate its product line with AI capabilities.
Put Options Volume High
Today's unusual put options volume can be seen in the Barchart Unusual Stock Options Report for Wednesday, June 12. The table below shows that there have been 5 large put options tranches, mostly expiring on Friday.
All the strike prices are out-of-the-money (OTM), meaning they are set at levels below today's stock price.
This could be due to both positive and negative sentiment on the stock. For example, some trades could be due to put option buyers who believe that the stock will fall by the close of trading on Friday.
On the other hand, some of the put option activity could be fueled by short sellers, who are betting that the puts will stay above the strike price by Friday. They are happy to collect the income provided by the put option buyers.
Shorting Puts for Income
For example, look at the largest volume put activity - the $212.50 strike price put expiring on Friday. That strike price is about $5 below today's price of $217.52, or 2.29% out-of-the-money (OTM). The midpoint premium is $1.11.
That means that the short seller collects a yield of 0.52% (i.e., $1.11/$212.50) for just 2 days until expiration. This is because the short seller has to secure $212.50 x 100 or $21,250 for every put option that is sold short. They immediately collect $111 by entering an order to “Sell to Open”. This represents a very high yield, since if it can be repeated every week for a month that could produce $444, or 2.089% of the $21,250 invested during the month.
Moreover, the short seller has some downside protection. The breakeven price of $212.50-$1.11, or $211.39, which is 2.81% out-of-the-money. These short sellers would be forced to buy into the stock at $212.50 if it closes at that price on Friday, but due to their income, they might not have a negative return.
Given that there still appears to be a good upside in the stock, they might not have any concerns about buying in at $211.39.
Moreover, short sellers have on their side the fact that options are a wasting asset. If the stock stays level, the put premium will decline as Friday close approaches. They can buy back their short sale at any time, especially if the put premium declines over time.
Put buyers might also feel that the stock has run up too far, too fast. That is why they are willing to take the chance that their purchase of puts will pay off, hoping that it will fall. This could be one way of hedging their bets as long investors in the stock.
Either way Apple stock looks like a good bet here. Heavy put option volume today reflects the renewed market interest in the prospects for AAPL stock.
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.
