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Apple Closing = $500 is Not Proof of Conspiracy

Posted By Barry Ritholtz On January 21, 2013 @ 12:50 pm In Options,Trading,UnScience | Comments Disabled

One emailer is an oddity, two a coincidence, three emails plus a respected tech site [1] 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 [2]. 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 [3], many [4], many [5] 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
[6]
Source: Investing with Options [7]


Article printed from The Big Picture: http://www.ritholtz.com/blog

URL to article: http://www.ritholtz.com/blog/2013/01/apple-exactly-500-is-not-proof-of-conspiracy/

URLs in this post:

[1] respected tech site: http://daringfireball.net/linked/2013/01/18/500

[2] pinning: http://en.wikipedia.org/wiki/Pin_risk_%28options%29

[3] many: http://www.ritholtz.com/blog/category/bailouts/

[4] many: http://www.ritholtz.com/blog/category/legal/

[5] many: http://www.ritholtz.com/blog/category/really-really-bad-calls/

[6] Image: http://www.ritholtz.com/blog/wp-content/uploads/2013/01/harmonic-oscillator.png

[7] Investing with Options: http://investingwithoptions.com/blog/2011/11/18/option-pinning-option-expiration-guide/

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