One emailer is an oddity, two a coincidence, three emails plus a respected tech site means this is a full blown trend. Thus, I am compelled to address this:

There seems to be a bit of paranoia circulating amongst the intelligentsia ignoramia that the mere fact that Apple’s stock closed at precisely $500 on Friday was proof positive of a grand conspiracy to manipulate markets.

The odds were so strongly against this exact close occurring randomly, the argument goes, that something nefarious had to be afoot.

Where this argument fails is that this is hardly random. You see, Friday was an option expiry — that is when all of the various Call and Put options at various strike prices expire in or out of the money. Apple being the single biggest stock (by capitalization) and one that has had some pretty big moves up (up 100% from Q2 2011 to Q3 2012 highs) and down (off 29% since 2012 peak).

Lots of these folks have their Apple common stock positions hedged with these options. If they want to cover some of their downside, they buy puts. If they want to juice their returns to the upside, they may own calls. But unlike stocks, which do not have an end date, all options have a time value and a date when they will eventually expire. Out of the money options expire worthless.

Which is what leads to pinning. There are folks who may want to roll their option positions over (sell the current month, buy a later month) or unravel a current position or create a brand new one. The largest open option position can impact trading of the stock.

Note that both options and stocks trade via continuous auction process. This sometimes results in prices being pinned to a strike price (see chart below). There was an enormous amount of open interest n Apple Options, and $500 is a big round psychological number. In this case, the $500 on the nose was the lucky winner.

There is an enormous amount of literature on Option pinning and (delta/gamma hedging) strategies to take advantage of it. It is a well known phenomena.

~~~

There are many, many, many things to be angry at Wall Street about.  This is not one of them . . .

 

 

Price action around a pin often resembles a “dampened harmonic oscillator

Source: Investing with Options

Category: Options, Trading, UnScience

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

28 Responses to “Apple Closing = $500 is Not Proof of Conspiracy”

  1. ByteMe says:

    ignoramia

    Using their Latin name makes them sound smarter… to themselves.

  2. steveplace says:

    Thanks for the link, Barry.

    If anyone has any questions about option pinning or my post, feel free to ask me and I’ll try my best to answer.

  3. Sirvasq says:

    It’s a simple conspiracy by Conduct. A conspiracy of fools. The same fools who sold $BAC because Zero Hedge screamed sell when it hit 5; the same fools who bought Nasdaq 5100, the same who bought oil at $140, the same who shorted Facebook at 15. An idiot conspiracy, fueled by headlessness, greed and fear.

  4. VennData says:

    With regard to innumeracy: Stocks that trade in pennies should close with round dollar amounts 1% of the time, that’s twice a year. Given the way options work, possibly more, but 1% is about right.

    The emotion people have about how badly they’ve been hammered by APPL is understandable. They are emotional, not logical about their investments. They “traded” the stock, buying in, more and more, as it went up. Now it’s down and they can’t accept their own idiocy, they need to blame someone.

    To quote Barry Rithholtz of Big Picture: “wtf?! Gallup Poll: 58% of Republicans Are Young Earth Creationists”

    http://www.ritholtz.com/blog/2013/01/10-monday-am-reads-44/

    When you constantly refute science, logic, and rationality, do you really think that doesn’t impact your thinking? I’m talking to the GOP voters (who seem to be one in the same, you know, the ones who “believe” cutting taxes raises revenues.)

    Be innumerate. You will get rolled. Enjoy being stupid.

  5. Frilton Miedman says:

    Experienced traders use O/I & volume to gauge probabilities, pinning is nothing new, I agree with BR’s premise that there is legitimate concern over various nefarious market practices, it hurts the case to grab at straws.

    That said, I’m not sure the door is completely closed, where CFTC position limits are still not in place and options fall under the CFMA, but I won’t argue any sensible explanations if that connection is incorrect.

    —-

    VennData Says:
    January 21st, 2013 at 1:59 pm

    “To quote Barry Rithholtz of Big Picture: “wtf?! Gallup Poll: 58% of Republicans Are Young Earth Creationists” ”

    ~~~

    There are times when a position is going too well and I tend to second guess myself.

    It helps to remember statistics like that, it’s profound how large the percentage of misinformed out there who’ll put their money where their mouth is and stand by their convictions based on piss poor sources or emotions..

  6. Outsider says:

    “Damped”. Dampen is to moisten.

    ~~~

    BR: Take that up with the folks at “Investing with Options

    UPDATE: No, you are wrong:

    damp·en (dmpn)
    v. damp·ened, damp·en·ing, damp·ens
    v.tr.
    1. To make damp.
    2. To deaden, restrain, or depress

    Take that, you OCD picture straightening wanker !

  7. Disinfectant says:

    According to conspiracy theorists, this post is proof that Barry is part of the conspiracy. You can never win against a conspiracy, you can only make it bigger.

  8. wally says:

    … and on the same day I was putting gas in my car and the pump shut off at exactly $50.00.
    Don’t tell ME there’s nothing mysterious going on.

  9. “…There is an enormous amount of literature on Option pinning and (delta/gamma hedging) strategies to take advantage of it. It is a well known phenomena…”

    Wait. You’re referencing ‘Literature’ ?!?

    wtf? you mean, I needed to, actually, Pass http://www.rif.org ?

    I need to Do my Own Homework?

    The ‘infographic’ didn’t tell me ‘all I needed to kno’?
    ~~~

    actually, I can’t, even, believe there are ‘People’, out there, calling ‘Conspiracy’ on these types of Events..

    that’s Pathetic.

    maybe, ‘They’ should familiarize themselves with..

    http://search.yippy.com/search?input-form=clusty-simple&v%3Asources=webplus-ns-aaf&v%3Aproject=clusty&query=options+max-pain

    or, altogether, differently..BR, don’t bother, and Stop ‘bothering the Herd’..you know, that’s where ‘Wool Pants’ come from, afterall..

  10. ToNYC says:

    APPL with huge underlying interest to insure in the same time/expiration series as the assurance of maximum 15% Capital Gains drove exceptional open interest in the derivative. APPL scratching at the recent lows is not a good sign and regularly cling-ons seek blame when thinking alternatives or moving on is much too troubling. Sometimes the dog wags the tail, sometimes the tail wags the dog. Size matters.

  11. Joe says:

    “Damped”. Dampen is to moisten.

    Yeah… Sometimes I despair. “Rear sets” were custom foot rest and pedal relocators used to convert street motorcycles to track use. Now all foot peg and pedal assemblies are “rearsets”. Even in the magazines. My daughter in law tells me the “stand pipe” (gutter drain) on the side of their house is leaking, (stand pipes are often seen and labeled as such on the outside of high rises )and that her harness boots are “engineers boots.” Sure enough, the right terms for the boots are being eroded on the web by boot retailers. There were pictures on the web of a drip bottle and sponge set up on the forks of a racing motorcycle done by an old timer who saw “steering dampener” in the rule book one too many times…

    Give it up. Just remember to refill your tuned mass dampeners and wring the moisture out of your harmonic vibration dampeners lest your rotating assemblies rust. See ya at the track.

    ~~~

    BR: See this

    Words actually have specific definitions within a language, despite their common or obvious meanings.

  12. bobmitchell says:

    BR beat me to it. It’s a perfect use of the word.

    http://en.wikipedia.org/wiki/Damping

    As for the conspiracy….I was in on it. Only people with both beards and bald heads can participate.

  13. Joe says:

    “Words actually have specific definitions within a language, despite their common or obvious meanings.”

    No argument. Custom defines the meaning and languages, lexicons and vocabularies evolve. But one of the few positive things ya get for hangin’ around along with the liver spots, baldness, gray hair, and arthritis, is the ability to have a genuine old man’s hissy fit over the way things used to be. I indulge myself.

    In real life, I’ll retire in the next coupla three months. Someplace inside my head, I’m still pretty much the same 100 MPH WFO kinda guy I was in my early 30′s. That kinda thinking will probably get me killed way too soon. The old man rants are kinda me trying my new persona on. Keep on keepin’ on.

  14. JimRino says:

    I think the real Conspiracy here is, the Exxon profit engine, run by an incompetent.

    Why are Exxon shareholders sitting back doing nothing, when they could hire a Real Innovator?
    Exxon has the ability to spend 20 BILLION a Year into the Wind, Solar and Battery market, and they’re doing NOTHING. This is the biggest shareholder BLUNDER OF ALL TIME.

  15. brianinla says:

    It’s damped, not dampened. As a physicist we had plenty of problem sets on damped harmonic oscillators. Stick to law stuff, science doesn’t suit you.

  16. RW says:

    What Joe said: It’s damped but give it up; language changes and American English probably changes more than most.

    I used to cringe every time I saw or heard the word “impacted” — for centuries impact was strictly a noun, never a verb (or you’d get your knuckles rapped) — but the past couple decades have done their work and now it’s in the fracking dictionary so there it is.

  17. RW says:

    Should have given an example there since “impacted” is a perfectly respectable adjective. It’s phrases like “impacted his profit margins” or “this proposal really impacts our clients” etc that used to get to me (I confess it still sounds vulgar even today).

  18. formerlawyer says:

    @brianinla Says:
    90,000+ articles on Google Scholar say you are wrong.
    http://scholar.google.ca/scholar?hl=en&q=%22dampened%22&btnG=&as_sdt=1%2C5&as_sdtp=

    dampen in the moisturizing sense was a later meaning the earlier sense was to deaden.
    “damp (adj.)
    1580s, “dazed,” from damp (n.). Meaning “slightly wet” is from 1706. Related: Dampness.
    damp (v.)
    late 14c., “to suffocate,” from damp (n.). Figurative meaning “to deaden (the spirits, etc.)” attested by 1540s. Meaning “to moisten” is recorded from 1670s. Related: Damped; damping.
    damp (n.)
    early 14c., “a noxious vapor,” perhaps in Old English but there is no record of it. If not, probably from Middle Low German damp; ultimately in either case from P.Gmc. *dampaz (cf. Old High German damph, German Dampf “vapor;” Old Norse dampi “dust”). Sense of “moisture, humidity” is first certainly attested 1706.
    damper (n.)
    of a piano, 1783; of a chimney, 1788; agent noun from damp (v.). Either or both led to various figurative senses.
    dampen (v.)
    1630s, “to dull or deaden” (of force, enthusiasm, ardor, etc.), from damp (adj.) + -en (1). Meaning “to moisten” is recorded from 1827. Related: Dampened; dampening.”
    http://www.etymonline.com/index.php?allowed_in_frame=0&search=damp&searchmode=none

  19. Frilton Miedman says:

    ” BR: …
    UPDATE: No, you are wrong:

    damp·en (dmpn)
    v. damp·ened, damp·en·ing, damp·ens
    v.tr.
    1. To make damp.
    2. To deaden, restrain, or depress

    Take that, you OCD picture straightening wanker !”

    ~~~

    Looks like they’re starting a club.

  20. VennData says:

    BR, fl, et al,

    Damph v. dampf? I’m pretty sure this is his is how the whole Hitler thing got off the ground.

    And while picture-straightening and wanking are mutually exclusive… wait a second, maybe they’re not…

  21. steveplace says:

    Dear internet neckbeards,

    Citizens of their parent’s basement rejoice! All is right with the world again.

    The post has been edited from a “dampened oscillator” to “damped oscillator.”

    Goes to show you the benefits of a public university.

    If you find any more nits to pick out of the text, let me know.

  22. VennData says:

    No. Can definitely be done concurrently.

  23. formerlawyer says:

    Barry, to my understanding was describing the process not the static state. The use of dampened was appropriate.

    /rant
    Actually what pissed me off was the “Stick to law stuff, science doesn’t suit you.” in brianinla’s post.

    Lawyers use words. They are our weapons. The use of a precise word in a precise meaning is required. We can of course use words in an imprecise manner to obscure meaning in order to preserve flexibility. In either case the choice of words is important. Note how Barry, a former lawyer does not edit his posts but uses strike-throughs to reinforce that point. Barry’s writing is clear, deliberate and grammatical. It is also fast (how do you do it Barry?) showing his facility with words. A little pipsqueak on the internet is going to challenge his word choice?
    /off

  24. ToNYC says:

    Easy tiger: If the diagram had said the harmonic oscillator “ran out of gas”, would that have raised the stress level? I’m thinking of the Teutonic titwillow blowing off Harvey Corman in Blazing Saddles here of course. Think of the single rose delivered by Cleavon Little when it comes to aetherial thoughts.
    Let’s face it, I’m pooped!

  25. foss says:

    Stop! Someone on the Internet is wrong!

  26. leveut says:

    1. The problem with conspiracies such as the Apple at $500 one, is that the theorists miss the real conspiracies.

    2. If Apple at $500 is a conspiracy, then the S&P at 666 a few years ago must truly have been the work of Satan.

  27. [...] Apple Closing – $500 is Not Proof of Conspiracy (The Big Picture) [...]

  28. yaalanhoo says:

    I think the idea of the conspiracy is not in the price, but in the series of rumors (e.g. WSJ says iPhone 5 parts orders cut due to low demand) leading up to the expiry date which had the effect of reducing upward pressure on the stock price. I have heard that Apple is heavily owned by institutional investors with professional management that probably aren’t affected by this stuff, but some percentage is owned by individuals and those shares seem like they could be swayed by these type of rumors. IIRC Jim Cramer gave an interview a few years ago about the topic of holding AAPL down before an earnings report.