Large, Unusual Volume in Long-Dated Apple Put Options Shows Investors Bullish in AAPL
Heavy volume in Apple Inc. (AAPL) puts expiring in one year with a strike price 4% lower shows that institutional investors are bullish on AAPL. In addition, this short-put play provides a 6.76% one-year yield.
AAPL is trading at $322.96 midday on Wednesday, Sept. 16. This is off a recent peak of $340.08 on July 28, but up from a trough of $302.25 on Aug. 12.
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However, AAPL could be near a peak based on analysts’ price targets. That might explain why some investors are willing to buy these out-of-the-money (OTM) puts. On the other hand, these price targets have risen in the last month.
Higher AAPL Price Targets (PTs)
I wrote about Apple’s valuation in an Aug. 2 Barchart article, “Apple Delivers Strong Free Cash Flow, But What is the Best AAPL Play?” I showed how AAPL stock could be worth $345.46 per share based on the company’s strong free cash flow (FCF) in its July 30 Q2 earnings release.
This was based on analysts’ Sept. 2027 revenue forecasts of $524.8 billion and applying a 29.5% FCF margin. Since then, this revenue forecast has risen to $527.97 billion (Seeking Alpha), so FCF could hit $155.75 billion (0.295 x $527.97b).
After applying a typical 3.0% FCF yield, the fair market value (FMV) could reach $5.192 trillion ($155.75b / 0.03). That’s 6.9% over today’s market cap of $4.857 trillion, implying a PT of:
$322.96 x 1.051 = $345.24 PT
Wall Street analysts have raised their PTs as well. For example, Yahoo! Finance’s survey shows $327.20 (up from $321.66 as seen in my last article). Similarly, Barchart’s survey is up to $328.18, up from $322.22, and AnaChart’s survey now shows $323.31, up from $316.31.
That’s why today’s unusual put volume at a lower strike price. It shows some investors may either be expecting a dip in AAPL or they want to buy at a lower price in case AAPL falls.
Unusual AAPL Put Option Volume
The long-dated put volume in Apple stock is shown in Barchart’s Unusual Stock Options Activity Report today. It shows that over 9,900 puts have traded at the $310.00 strike price, but the expiry period is one year from today, Sept. 17, 2027 (i.e., 366 days to expiry or DTE).
This volume is over 17x the prior number of contracts outstanding at this strike price, which is 4% below today’s price and the DTE period.
The short-sellers of these puts collect a $20.95 premium immediately. That means they collect an expected one-year yield of 6.76% (i.e., $20.95/$310).
However, these short-sellers have the obligation to buy shares at $310 if the stock falls to this price and their account is assigned to buy shares.
That is not necessarily such a bad thing. For example, the already collected premium means that the breakeven point is $310-$20.95, or $289.05. That’s 10.5% below today’s price. So, it provides an attractive buy-in point for these investors.
Expected Returns for Put Sellers and Buyers
Here’s why. If AAPL eventually rises to a $345.24 fair market price target, as I suspect it will, as long as its FCF margins stay strong and revenue rises, the investor will have a good expected return:
$345.24/$289.05 -1 = +19.4% upside
Buyers of these puts obviously believe that AAPL stock is near a peak. After all, analysts’ price targets are only slightly higher than today’s price.
They are happy to bet that Apple stock will drop below $310 and also pay the premium. They will only see an intrinsic value profit if it drops to $289.05, or 10.5% below today’s price.
For example, it’s not uncommon for AAPL to dip after its earnings release. The next one is due out at the end of October, so these put option buyers may be expecting a decline.
They can then unload their long position at a profit. However, the risk of loss here is much higher than for a short-put investor.
The bottom line is that shorting these out-of-the-money (OTM) puts looks like an attractive play for long-term bullish investors. Short-term put buyers expect to see a dip in AAPL.
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. This article was originally published on Barchart.com