Edible Apple

On Friday, Apple shares closed at exactly $500 a share, and in the wake of reports regarding a bevy of call option activity some believe that forces of market manipulation may have been rearing their ugly heads.

Specifically, it’s been reported that there are approximately 60,000 call options betting that shares of Apple would be priced in the $550 to $700 range come January 19. As a quick primer, a call option enables a prospective shareholder to pay for the right to purchase a stock, at a future date, at a predetermined price.

Karen Haslam breaks it down:

So, if you had purchased one of these call options written in the summer you would have had the right to purchase, say, 100 Apple shares at the price of $550 after 19 January. With each call option giving the buyer the right to purchase 100 Apple shares, billions of dollars could have been tied up in this bet.

If you had bought a call option and Apple had remained at $700 you’d have been in the money by $150 a share. The money managers who wrote the call options would normally prepare for such an eventuality. When call options are written, the money managers usually cover their backs by purchasing stock of their own – this way if the stock price increases above the price range they don’t lose out. This could explain why the stock soared in the summer months – Wall Street may been buying up Apple shares to cover the bets being made with the option calls.

However, with AAPL down at $500, the person who wrote the call option in the first place is the one laughing all the way to the bank because the investors have to pay $50 more per share than the stock is worth. Hence the theory that there has been some stock manipulation.

It appears that the institutional money managers that wrote those call options last summer stood to make a lot of money as long as the price remained below $550 on 19 January.

While it’s easy to dismiss the notion of market manipulation, there’s a lot of circumstantial evidence to suggest that something is afoot. Of course, there’s the Wall Street Journal article regarding Apple scaling back its iPhone display orders which was suspect to say the least. Also, remember that Apple has long been a favorite target of investors looking to manipulate shares for their own well being. In fact, Jim Cramer explained how easy it was just a few years ago.

And once again, in case you missed it, Joe Springer of SeekingAlpha wrote the following this 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

via Macworld