Why Apple had to close at $500 on January 19

Why Apple had to close at $500 on January 19

Joe Springer on Seeking Alpha proposed the following theory on why institutional money had a lot to gain by pushing Apple's stock price down to $500 by January 19, and a lot to lose if it had remained substantially higher.

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

It's an interesting theory that I don't know enough about, one way or another, to provide any commentary on. (We'll ask Chris Umiastowsky to weigh in when he can). Maybe Apple just sucks now and everyone who likes Apple products is panicking and ass covering, or maybe there's a concerted effort to make money at Apple's expense. Often the truth lies in between the extreme.

Any smart investor types out there have any light they can shine on this?

Source: Seeking Alpha via Daring Fireball, Loren Brichter

Rene Ritchie

Editor-in-Chief of iMore, co-host of Iterate, Debug, Review, The TV Show, Vector, ZEN & TECH, and MacBreak Weekly podcasts. Cook, grappler, photon wrangler. Follow him on Twitter and Google+.

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There are 24 comments. Add yours.

joshapple says:

This is called option pinning. Only expiration the price usually gravitates to the strike price with the most open interest. January is big expiration because those options have been trading for 1-2 years. Market makers usually push price to make those options worthless.

okli says:

This Game is between Banks( who write the options) and Hedge Funds( who plays the option)....DUDES... and all of them can and do manipulate the Stocks... one way or the other...

Oletros says:

If the options have a price of $550 why the $500 figure?

richard451 says:

because the story had to be written and AAPL closed at $500?

It is odd that everyone except the original author is quoting $500 but it's probably best we don't question and just accept these rants.

Rene Ritchie says:

How is this a rant? It's a theory that may or may not be true, and I'm interested in the discussion, pro and con.

richard451 says:

it's a rant because your argument/article doesn't explain why Apple had to close at $500.

Here is your opening paragraph;

"Joe Springer on Seeking Alpha proposed the following theory on why institutional money had a lot to gain by pushing Apple's stock price down to $500 by January 19, and a lot to lose if it had remained substantially higher."

If you read the article, $500 isn't even mentioned. Why aren't you explaining that? Is it the number itself? Does $500 have some significance to you? Do you think the author of that article appreciates you bending his words to match your reality?

Read the article again and look at the activity. The majority of the options are for $600 and greater. Looking at your sources; it's only you and Daring Fireball that brought up the $500 conspiracy. I see manipulation going on, but it's not by large investment firms...

Items like this make it difficult to have a reasonable discussion

renstein says:

Actually, it isn't a rant, by definition of the word rant. And the fact that common usage of the word rant generally matches the dictionary definition.

keneo says:

"rant" I don't think that word means what you think it means.

robert.walter says:

Wouldn't more higher priced options, like the 600$ ones, just reinforce the 500$ option argument? Can't moving a stock to a 500$ market level be seen as what's necessary to pressure a stock so as to make money on expiring 600$ options with minimal risk of the stock climbing fast enough to surpass 600$?

But, not knowing how such things happen, if it was so easy to manipulate a stock's price so as to make money on options instead, why wouldn't every stock take a similar beating all the time?

I dont understand the market here at all either. Would be interesting to understand how much of these moves are based on fundimentals, how much on speculation, on manipulation, and how much on the stupid money just aping the moves of the smart money and the speculators.

Rene Ritchie says:

Me too. I'm not stock smart.

joshapple says:

Don't know where the 550 came from but there was significant open interest in the 500 call and put. They usually like the big round numbers anyway.

SockRolid says:

"There is a fundamental conflict of interest on the part of analysts who recommend stocks of the companies that their firms do business with. Until we have a change in the way Wall Street works, this will continue to be an issue. From an investor's standpoint, the best you can do is be aware of it."

- Maria Bartiromo, CNBC

SockRolid says:

Re: "...maybe there's a concerted effort to make money at Apple's expense."

Most likely. Wall Street is ruled by two instinctive, basic emotions: fear and greed. The greed is revealed when there's an irrational run-up in a particular stock (e.g. Yahoo in the late '90s). The fear is revealed when major investors sell on profit-taking, which triggers the panic-sell stampede (e.g. Yahoo in 2001.)

Many analysts, brokers, and investors are tech-ignorant. Their opinion of Apple was formed in the mid-90s, or if they're younger, their opinion of Apple was formed by reading business school case studies of Apple in the mid-90s. Overpriced goods, niche player. Not any more.

This fear of Apple is made worse by Apple's secrecy. Just a little guidance about margin and product line mix, but no future product plans. Everyone has exactly the same financial data about Apple. So they're either forced to guess where AAPL is headed in the next three months, or they're forced to try and manipulate AAPL by spreading rumors and lies.

Harder to spread those kinds of rumors and lies in, say, the retail sector. Or the energy sector. Vastly fewer moving parts. Easier for everyone to understand, so the BS is more obvious.

mech1164 says:

Have to agree with you on many points there. That said though since before the new year APPL has been on a slide that may be more than just profiteering. For all the good Apple is there is a perception now that they are not on their A game. Rightly or wrongly that's how many people feel.

What will determine whether it's 700 or 420 depends on what we see in a few weeks. They need the iPad mini retina period and IOS needs a major UI overhaul. Either of those don't happen there are going to me more questions on if the Magic is finally gone with Jobs. For the Faithful it won't matter. That share of buyers though who won't come will.

rkevwill says:

Its been a lot of years, since I have seen a stock where so many people/companies want to see a company fail like this. A lot of speculators, and a lot of companies have a lot to gain, if Apple tanks. Frankly, even if Apple blows out the numbers on Wednesday, there are gonna be a lot of talking heads, saying its not good enough.

renstein says:

Except that none of this is actually at "Apple's expense", except for the stock that Apple holds in itself. It is making money off of other investors. The negative rumours in the press may hurt Apple, but in the same way that all the other negative rumours that are always in circulation.

What it really sounds like is market manipulation. I mean really, some people said that Apple has to close at $500 or less on this given day, then it closed that day at exactly $500 is really odd.

It shows the imbalance of power there is in the stock market. The fact that stock prices can be decoupled from the actual business fundamentals in order to make people money indicates that it no longer works as it should.

keneo says:

Here is an explanation of why this occurs
the article is called "Apple's $500 Close: It's Not Manipulation!"
http://www.thestreet.com/story/11817406/1/apples-500-close-its-not-manip...

keneo says:

The Seeking Alpha article may explain why the stock price was driven down below 550. But it does not explain why the stock price was pinned exactly to 500 for the longest time and into closing. I watched the price action and was the strangest thing in that it was very much like watching your floor boards warp, only more boring. The price would not stray more than 10 or 20 cents above OR below 500. This went on for the last 15 min and the range tightened to 1 or 2 cents into the close and after hours. Someone attached a electric magnet to 500 and juiced it more as the close approached. Max pain

Mazon says:

This is why I do not get involved in anything related to the stock market.
Don't get it at all, and it's gambling, pure and simple.

Keep my money in my matteress, much safer there.

Those thieves on Wall Street cannot steal it that way.

Bobert_123 says:

Why make comments like that if you know nothing about the market? What you just said there was proof that you really know nothing about it.

ghodagadi says:

Isn't that a gamble too. What if you pee'd in bed, you would ruin all that money in the mattress. :-) They might not want to steal it then. So some merit in your strategy.

joshapple says:

Market makers are buying and selling stock against their option position to be delta neutral. They establish a liquid market but don't necessarily want exposure to either side. If they are short calls they will buy stock against it to maintain that equilibrium. If they are short puts they will sell stock against it. It's that constant struggle from either that side keeps the stock pinned to that price. It's not magic, it's not manipulation persay, just management.

ghodagadi says:

It would be great to get a graphic representation of this. Its hard for most of us to follow and yet its an interesting topic. Are there other cases of this especially with a stock that was followed as closely as Apple?