Apple Feels 'Max Pain' 54 comments
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Many of you are probably wondering what is going on with Apple (AAPL). They come off a historic product release, products are flying off the shelves, customers are in lines that extend for blocks waiting to hand over gobs of cash, and the media is abuzz 24/7 over Apple’s sheer brilliance. Yet the stock is stuck in the mud. Then to add insult to injury, Oil tanks three consecutive days and the markets rally, finally the Bears Capitulate. Yet, Apple is left behind. What gives.
It’s called the Max Pain effect. Max Pain is a theory that 90% of all people that purchase options will hold those options until expiration, and rendered worthless. So, there is a formula that figures at what price point will the maximum number of people lose money if they held their options until expiration. The Max Pain effect is the tendency for a stock’s price to gravitate towards this number as we approach the options expiration date.
As you can see from the graphic below, the max pain point for AAPL July 2008 options expiration is $160. Now, options expire today (Friday) after the closing bell. The price of AAPL over the past few days has moved towards the Max Pain number. Now you may ask, why hasn’t Google (GOOG), Research In Motion (RIMM) or Baidu.com (BIDU) experienced this same effect. Well, the answer is simple: their Max Pain points have all been above their trading price this week. So, they have been pulled higher, while AAPL has been pulled lower.
click to enlarge
This is not to discount the unfortunate earnings report from Google, and the subsequent drop in price after hours last night to 492.75 -40.69 (7.63%). Although Google had increased revenue by 35% over the same quarter last year, it missed on earnings by only a few cents reporting $4.63 a share, compared to analysts consensus of $4.74 a share. In a bear market, any kind of miss is not good. This combined with poor earnings from Microsoft (MSFT) and Merrill Lynch (MER), helped push AAPL down in after hours to 168.00 -3.81 (-2.22%). By the way, the rest of the horsemen were down too.
Now, I know my next statement is going to sound masochistic, but here it goes anyways. This earnings bomb is a good thing, it’s precisely what we want to see, because now, we get to test the strength of the move upwards. Will it hold, or crumple like so many false rallies before?
Today will be a big day, because it will tell us if the recent move up is true capitulation or just a bunch of hot air. With these poor earnings and GOOG, along with the rest of the horsemen giving up some big points, the Nasdaq will likely gap-down tomorrow. This will be a test for the emotions as well, especially if you have skin in the game. If you’re playing it tight and safe, like many of us in the Wilderness Group, I suggest you keep it that way, at least until the market reveals itself.
UPDATE: (Friday morning, June 18, 8:20 am): Futures are looking up, seems that last night’s earnings had little negative effect on this capitulation rally. I believe today is going to be a good day for Apple. I also believe the Gartner Group report on PC shipments portends another great quarter for our company, and that the lull in iPhone sales in the last 1/3 of this past quarter will have negligible affect.
Disclosure: Long AAPL
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This article has 54 comments:
Let me know when you get the to the part in the book where it states management must come out and yell at people for selling their stock in a down market. Then try taking an investing approach with a time horizon of more than a few months instead of looking for a quick 50% on the money you borrowed from a cash advance on your credit card.
Nice post Zach.
Very interesting post Zach.
There are an awful lot of traders who are pretending they are investors
I would like to know how the AAPL stock price will be helped if Jobs were fired. The possibility that he may leave for health reasons recently took the stock price down.
There are an awful lot of traders who are pretending they are investors
And the childish behavior of Apple Fan Boys whenever anyone questions their cult of personality demonstrates that buffoons are long in AAPL. I made a bundle off of shortin JD Uniphase, I made a bundle off of shorting AAPL in Dec/Jan and I plan to make yet another bundle as I am riding this pig down into nice short profits.
Cry in your milk Apple Fan Boy kiddies.
Sure, sure, whatever you say. Long since $1.07, you've made how much profit selling at the highs?
You made my point about childish behavior very clear young boy.
Keep it up. You are doing a Yeoman's job of demonstrating how childish the Cult of Jobs followers are. But we love ya, shorting is profitable but wouldn't be half the fun without watching the neophytes lose their shirts and piggybanks.
I would not call you idiot today, is like firing on the red cross.
Pero' faccia come il culo te lo dico, va'.
Clearly, as a few here have hinted, this particular stock, being so prominently in the public eye, can be and is manipulated by a few unscrupulous "expert analysts." Apple's stock price, since it's traded by so many people with less trading experience, whips around like a coked up ferret every time one of these so-called experts says that Steve Jobs looks like he's dying or there are a million unsold iPhones in a warehouse in Sheboygan.
Zach's article is brilliant! He's hit it on the head. As in the oil industry, the big traders, mostly of the option variety, do everything in their power to manipulate stock prices from the intside while the rest of us are just along for the ride. A great company with sound fundamentals, an unprecedented history of innovation and product success should not be getting hammered like Apple has been, especially in the midst of one of the most successful product rollouts in history.
I do agree however, that Apple should have done a huge stock buy back when the price tanked at the beginning of the year.
iphonedied, you don't have any room to talk about childish behavior given the screenname you've chosen to use. Only immature punks choose to troll as you have in this thread. As far losing MY piggybank, AAPL has paid for a beach house and Bentley for me over the past 9 years, so I'm not too worried about whatever pennies daytraders like you manage to scrape up every now and then, it certainly doesn't affect my net worth. But have fun playing your little games trying to move up in the world, maybe someday you'll know what REAL wealth is.
It's full of full blown haters who start telling you "short! die!", "I'm rich!", "hope your short will kill you", and the like. A bunch of stupid blind people.
Sorry Mr. Bass, I won't be civil to this lowlife.
My post was:
"Ladies and gentlemen (a few), well below 170, like your good old Toni was telling you the past two weeks."
Was that too rude ?
People IS filth, for the most part, you must accept that and live with that, or block posting. I suggest you to ignore the noise or start banning, if you can. Well, I can tell you you can't. Not me, anyway.
Peace
No, but it appeared as if you are gloating at the fact that Apple, which has not yet reported is being tarred with the same brush which tarred Google and RIM for missing and/or guiding lower.
Now to the good stuff.
To AMT: Am I delusional that Apple is down almost 19% YTD as of today's close??? How can this be??? Macs, iPhones, iPods, and notebooks are literally flying off the shelves. So who's to blame??? In my opinion, Apple's stock is being punished because Wall Street isn't seeing what they want to see out of management. Partially, for the reasons I've already listed in my previous post and partially for reasons I am unable to identify. I don't care what you say, these reasons cannot and should not be ignored. Apple management has lost their touch. Yes, they were great when they were under pressure after the dot com boom. They were great when the iPod excelled. But that's ancient history. What have they done for all of us lately??? We all see their success and we back them up with the ultimate optimistic gift; we invest our hard earned dollars in their company because we love their products and we believe in their company. Isn't that what capitalism and being an American is all about? Now I'm a long term Apple stock holder and I agree that maybe some traders get easily bent out of shape cause they're in margin. Oh well, too bad, deal with it. But we must keep a close eye on management, they must be held accountable. Are you really willing to accept the fact that it's okay that Apple's down 19% YTD and chalk it up to market forces or the like. Take a look at the post by RIHARDM, a former CEO. He said he'd have this stock flying at around $600 per share. Could he really be that wrong, given the incredible success Apple's shown over the past year??? Yes, we all know that Apple would take a major hit in stock price if Jobs was ousted. But when do you say enough is enough??? His ego is killing us shareholders, slowly. Do you think Larry Ellison would have allowed this crap to happen if he was CEO? NO WAY! That pit bull would have taken Apple to new highs with the kind of success Apple has had so far this year. Thus the difference between a CEO and a someone who clearly isn't qualified for the job. Jobs is great for innovation, design, and presentations. Nothing else.
Dow and NASDAQ are 20% down for the year and people whine about AAPL being punished because of the general malaise and poor performance by RIM, Google, and Microsoft!!
Do you just mean that the stock is off its highs. . . just like AAPL?
Why anyone would put money in this is beyond me
and that is why we love him and why Apple is the great innovating company they are....
Thanks again for this post.
iPhone: The bet Steve Jobs didn’t decline
counternotions.com/200.../
@ Apple Heavy: I clearly said in my post that if Larry Ellison was in tact as Apple's CEO with the SUCCESS that Apple has had (not Oracle); the stock would DEFINITELY be much higher than it is today. I stand by that statement 110%.
My overall point is this: How can Apple be down this badly YTD when they CONTINUALLY beat earnings estimates and defy everything that the media is telling us about the markets and everything that IS happening to the markets? Their fundamentals are excellent! But the market sucks. Like I said before, I understand selling off some Apple shares at some point this year due to the severity of the crisis we're still going through. But at the end of the day, are the big boys ever going to choose to notice the lines at AT&T and Apple stores for iPhones? How about the incredible sales figures of Macs? In my opinion, Apple is and will be the greatest growth story of the next ten years. We're now over 6-1/2 months into this year, I hope that the big boys start to wake up some time soon. Cause if Apple doesn't go up, there shouldn't be any hope for ANY stock!
So, the CEO dictates or controls the stock price ??!!
As long as Apple stays focused on those great products, without a care for shareholders beyond "just be quiet and hang in there", I'll stay a happy investor. That stance is what's going to bring the patient investor a fantastic reward.