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There was something that caught my eye on Friday. Something similar to what I pointed out back on April 4 in my article "A Flash Crash Is Not Only Possible, But Likely" when I spoke about "wild speculation."

This has to do with Apple (NASDAQ:AAPL). Basically, today I noticed that the call options trading on Apple went wild again. In just the front month, around 379500 calls traded hands. The underlying to 379500 is 37.95 million AAPL shares. In the cash market, only around 15.7 million shares actually traded hands, while the 3 month average volume is 14.4 million shares traded daily. So Apple's front month call options traded the equivalent to 242% of the daily volume and 265% of the average 3 month volume.

Back in April, when I called the attention to the call option trading volume in Apple, those values were 191% and 289%, respectively, so they were in the same ballpark as Friday, though back then volume was higher both for the options (56.99 million underlying shares) and the shares (29.8 million for the daily volume and 19.7 million for the 3 month average). Anyway, it seems that the values today indicate about the same level of speculative activity. I say "speculative activity," since obviously options are mostly a speculative, leveraged, instrument.

Why is this important?

Back in April, I called attention to this sign of speculative activity because it seemed to point towards the possibility of a speculative top and impending correction. As we can see in the chart below, indeed a top and meaningful correction was just days away at the time (source: Stockcharts.com):

(click images to enlarge)

The blue arrow indicates the day that call option trading volume got my attention. That was April 3. Apple closed at $629.32 that day, and still managed to trade about $10-$15 higher three days later. But as the chart shows, the speculative activity did occur quite close to a near term top. Fourteen sessions later, Apple closed as low as $560, 11% lower than the close on the day I noted the speculative activity. Eleven percent is not huge, except we're talking about leveraged speculation, and in a stock that's not really known for correcting much.

Negative catalyst

What could make Apple have a quick correction? I think it's possible that China fears might hit the stock market within the next two weeks. Iron ore, met coal, the baltic dry index -- there are many indicators that have been plunging quickly in the last few weeks. And today, the market took some notice of those indicators, with AUD/USD dropping a quick 0.90% against a positive stock market -- which is unusual. Also, several stocks that could be hit directly by the China fears were weak during the trading session, such as US Steel (NYSE:X), Rio Tinto (NYSE:RIO) and VALE S.A. (NYSE:VALE). This indicates that the market might be ready to listen to the Chinese developments that have been taking place.

Near-term positive catalyst

On the other hand, for something negative to hit Apple, it has to happen quite quickly. Why? Because Apple is expected to unveil the iPhone 5 and mini-iPad on September 12. Usually, such presentations are anticipated by some bullish speculation, so there's just about two weeks maximum for negative movement to develop before this renewed speculation takes Apple higher again.

Conclusion

There are signs of excessive speculation in Apple call options, similar to those that took place in April right before Apple had a meaningful short-term correction. Those signs might lead to a similar movement in the next two weeks, possibly aided by a flare-up of China economic fears. If this were to happen, it would then set the stage for renewed bullish speculation right into the presentation of the new iPhone and mini-iPad.

Source: Excessive Speculation In Apple Call Options?