(Here's the full article from TheStreet.Com. I suggest you all get free accounts, and then upgrade. It's worth it.)
Juicy Apple Stock May Force Options Traders to Get Squeezed
By Eric Moskowitz
Senior Writer
7/14/99 9:00 AM ET
The Apple (AAPL:Nasdaq) executive who picked July 14 as the date for the company's third-quarter earnings announcement should get a candy-colored treat from shareholders.
Sure, the date comes a week before Apple's cult of investors assemble in New York for Macworld Expo, a biannual love parade for all things Mac-related. The event, where Apple CEO Steve Jobs will once again deliver the keynote, never fails to put a jolt into the company's stock price. Apple's stock closed Tuesday down 13/16 at 53 11/16.
No, the real timing coup is that Apple's earnings come two days before options expiration, a monthly event that forces options traders to settle their bets. Thanks to a 30% surge in Apple's stock price in the past two weeks, options traders are now desperate to cover short equity positions they hold against options. That may fuel even more gains.
Apple Shorts Help Send Stock Soaring
The big stock move has investors discounting a strong quarter.
"If Apple can get above 55, all the options sellers are going to have to buy shares to cover because there is no way to hedge for July options," says Harvey Baraban, an Apple shareholder and a trader who teaches technical analysis courses in San Francisco. "It's a beautiful set-up for Apple investors." Such early short-covering may have contributed to some of Apple's recent rise.
One options trader dissected how a potential short squeeze in Apple could take place ahead of Friday's expiration. The stock has been on a tear lately, and "it's possible that the specialist in the option has been selling calls at every strike price," says a Philadelphia-based options trader, who spoke on the condition of anonymity. Such a strategy is known as covered call-writing, under which the options trader buys the stock and writes call options against it.
Sometimes, however, options traders take more risk and decide to sell calls naked, that is, without owning the underlying Apple stock. Early in the month, before Apple's stock took off, that may have seemed like a better idea than it does now. Since then, the stock has run through several strike prices, leaving the writers of those calls in a position to lose large sums of money.
So let's say the stock climbs to 55 or even 60 by Friday, and a trader has written, or sold, July 45 and 50 calls naked, that trader would be forced to cover, or buy back, the stock at a loss upon expiration. That could trigger a short squeeze that could drive Apple's stock even higher.
"If the specialist, for example, was selling calls in the July 40s, 45s and 50s, they could be short hundreds of thousands of shares," the trader says. "If they're hedged, they're OK." If not, they're in trouble.
Usually stocks hold within specific trading ranges and only very good news -- superior earnings, hot new products, a key upgrade and so on -- break them out of this cycle. Until this month, Apple was no exception; the stock hadn't traded at its current level since June 1993. Besides an upgrade from BancBoston Robertson Stephens analyst Dan Niles last week, there was no news on Apple, so options traders speculated that the stock wouldn't shoot up so much. They were wrong.
Apple's Earnings Outlook
Analysts' expectations for Apple's third quarter ended June 26 is for net income of $102 million, or 64 cents a share, according to First Call. The revenue estimate of around $1.6 billion will give Jobs & Co. 14% year-over-year revenue growth for the quarter, Apple's best number in almost four years. In the company's year-ago quarter, Apple had net income of $75 million, or 50 cents a share, on revenue of $1.4 billion.
Analysts say this quarter's result is expected to be strong because Jobs will want to keep the company's tremendous financial momentum going through the four-day Expo. "Strong" usually means a 2- or 3-point upside surprise, says Eric Yang, editor of Macintosh Evolution and a self-described Apple balance-sheet number-cruncher. Whisper estimates, for what they're worth (not much), range from 66 cents to 70 cents.
There are many issues that could crop up on either Wednesday's conference call or next week's keynote address from Jobs. First and foremost is the expected rollout of Apple's much-anticipated consumer portable, codenamed the P1 or Student Notebook, but likely to take the moniker iBook. Although there have been rumors that the iBook may be delayed, those rumors seem to have died down a bit, says Yang.
A more interesting development that seems to be gaining momentum is Apple rolling out its own retail stores, a subject broached by TSC three weeks ago. Since Apple products for the most part reside inside large computer outlets such as CompUSA (CPU:NYSE), it may pay for Apple to break out its brand and follow in the footsteps of those PC marketing maestros, Gateway (GTW:NYSE), which won over the hearts of sell-siders with its Country Store model.
Apple added further fuel to these rumors when it added Gap (GPS:NYSE) CEO Millard Drexler to its board of directors May 26. Apple has declined to comment on the retail store rumors, but don't be surprised if Jobs has something big up his sleeve for his subjects next week at MacWorld Expo. |
