Apple's Intraday Reversals And Options Expiration

Mar.16.12 | About: Apple Inc. (AAPL)

In the comments section of my article, "Attention All 'Muppets' - Keep Buying Apple," a reader asked me a question regarding recent intraday sell-offs in Apple (NASDAQ:AAPL) and the possibility of those sell-offs being related to options expiration week. It's a great question that I would like to address in the paragraphs that follow:

First, it's always possible that, during options expiration week, some out of the ordinary happenings might occur in stocks. During the four weeks from February's options expiration day to Apple's all-time high at $600.01 on March 15, its stock rose nearly 20%. During that time, it is likely that many investors made a whole lot of money on any call options they were long. If, along the way, people were selling those calls to book profits, the market maker, being on the other side of that trade (buying the call from the investor/trader), would likely want to hedge his or her book. Part of the hedging mechanism might have involved selling Apple's stock to balance out the long position the market maker would be assuming via the calls.

It's also possible, although I find it more unlikely, that someone owning a tremendous amount of call options decided to exercise the options and sell the stock in the open market. It would cost a ton of money to do this, and it would have to be someone with incredibly deep pockets. But, if a major market participant wanted badly enough to make a statement, it technically could be done.

While I cannot definitively rule out options expiration week as an explanation for Apple's wild intraday swings during recent weeks, two reasons I tend to think otherwise include the amount of volume accompanying the intraday sell-offs and the incredible ability U.S. equity markets possess in moving large volumes of stock through dark pools without affecting share price. The dark pool route would be a possibility for a market maker looking to hedge his or her book due to any large call selling during recent weeks.

Let's briefly review some of the volume during the recent sharp intraday sell-offs. On March 5th, during a one hour period in the morning, the stock dropped from $546.91 to $526, a 3.82% drop. The volume absolutely exploded during the drop with 5.1 million shares trading between 11:15 am and 11:30 am. That amounts to 17.74% of the entire day's volume in just 15 minutes. During that same time, the Dow Jones Industrial Average (NYSEARCA:DIA) and S&P 500 (NYSEARCA:SPY) dropped less than 1%; the Nasdaq 100 (NASDAQ:QQQ) dropped 1.33%.

On March 7th, there was also a sharp intraday sell-off that began during the 1 pm EST hour. The drop amounted to 2.46% in just over two hours. In the fifteen minutes prior to the beginning of the sell-off, Apple's stock traded 349,942 shares. Suddenly, the 15-minute volume spiked to 1.83 million shares, and the sell-off commenced with volume remaining elevated for the remainder of the day. On both March 6th and March 8th, Apple's stock dropped 1.5% in a 15-minute span. Those aren't as bad as some of the other examples, but it is something to note given the frequency of the recent intraday moves lower. The March 6th drop was accompanied by 4.7 million shares, a little more than 16% of the day's total volume in just 15 minutes.

Most recently, on March 15th, the intraday selling saw 15-minute periods during which 4.97 million and 3.99 million shares traded. On March 14th, during a 15-minute 1.56% sell-off, the stock traded nearly 3.6 million shares.

It's understandable that investors will hold various opinions about the reasons for and the meaning of the sharp intraday sell-offs in Apple's stock during recent weeks. What I find particularly interesting is the speed with which the drops are occurring. The selling pressure arrives for a very short period of time on a good deal of volume, and for a few minutes, the stock looks like it's in a mini Flash Crash.

As I mentioned in my article, "Attention All 'Muppets' - Keep Buying Apple," a firm (or perhaps a few firms) with the ability to move a half trillion dollar market cap stock choosing to sell part of its position (or enter a short position) is something of which investors should take note. This might indicate that a near-term top in the stock is on the horizon. While I don't outright dismiss the possibility of options expiration having something to do with the most recent wild intraday swings in Apple, I favor the explanation of someone beginning to liquidate a long position over the possibility of market makers unable to hedge their books without causing massive moves in this $500+ billion market cap stock.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.