Why did Apple close at exactly $500 on Friday? Has Apple been the victim of stock manipulation? As we wrote last week, call options written this summer were due to expire on 19 January and some savvy money managers could have been in a position to make (or lose) money depending on which way the stock went.
After months of dramatic declines, the Apple stock faced a rough ride last week after a Wall Street Journal report claimed that the company had halved its component orders for the iPhone 5. After a week that saw Apple fall to its lowest level in almost a year, the AAPL stock closed at exactly $500 on Friday 18 January. Is this evidence of stock manipulation?
As we wrote last Tuesday, the effect of the WSJ report on Apple’s share price was mysterious given that the report was an old story that broke (and was covered by Macworld UK) last December, and given that the report included inaccuracies which WSJ later removed. We felt certain that something else was at play, and having discover that call options written this summer were due to expire on 19 January we were curious to learn what would happen to Apple’s stock in the run up to that day.
We weren’t alone in our suspicions: "If you don’t smell stock manipulation here, I have a bridge to sell you," wrote John Gruber on Daring Fireball.
Apple Call Options called out
Back in November Joe Springer at Seeking Alpha wrote that there was an: "Enormous amount of call options speculation" related to Apple's "Summer surge". In fact, according to reports, there were around 60,000 call-option "bets" that AAPL would be priced in the $550 to $700 price range on 19 January.
A call option gives the holder the right to purchase 100 shares of a particular stock at a specified price on the options expiration date. So, if you had purchased one of these call options written in the summer you would have had the right to purchase, say, 100 Apple shares at the price of $550 after 19 January. With each call option giving the buyer the right to purchase 100 Apple shares, billions of dollars could have been tied up in this bet.
If you had bought a call option and Apple had remained at $700 you'd have been in the money by $150 a share. The money managers who wrote the call options would normally prepare for such an eventuality. When call options are written, the money managers usually cover their backs by purchasing stock of their own - this way if the stock price increases above the price range they don’t lose out. This could explain why the stock soared in the summer months - Wall Street may been buying up Apple shares to cover the bets being made with the option calls.
However, with AAPL down at $500, the person who wrote the call option in the first place is the one laughing all the way to the bank because the investors have to pay $50 more per share than the stock is worth. Hence the theory that there has been some stock manipulation.
It appears that the institutional money managers that wrote those call options last summer stood to make a lot of money as long as the price remained below $550 on 19 January.
After writing our article last week we received confirmation that if the speculation is correct, and fund managers have been writing call options and trying to keep the price below $500, this could be considered a case of market manipulation – which is illegal and punishable by a prison term in most countries. Stock price manipulation is illegal under US securities law.
This isn’t the first time possible AAPL stock manipulation has been apparent. A Fortune report in 2011 highlighted concerns that Apple’s stock was consistently seeing suspicious price changes on Fridays when options were set to expire.
That report noted one example: “It was 3:48 p.m. on Friday April 29 and traders who had purchased Apple (AAPL) April 29 $350 "calls" - options that gave them the right to buy Apple shares in blocks of 100 for $350 per share - were sitting pretty. The stock was trading around $353.50 and those calls were worth more [than] $350 apiece (the difference between the price of the stock and the so-called "strike price" of the option times 100).
“Then, in an extraordinary burst of trading - exacerbated by the rebalancing of the NASDAQ-100 scheduled for the following Monday - more than 15 million shares changed hands and the stock dropped below the $350 strike price just before the closing bell. Result: The value of those calls disappeared like a puff of smoke.”
If, as appears to be the case, manipulation is apparent, a case could be made for an SEC investigation into some of the larger institutional buyers of AAPL and their motivation to influence the stock's behavior, writes MacNN