On this day, AAPL (along with many other optionable stocks) experienced substantial increase in volatility, as follows:
Note that 45 minutes before closing, AAPL was trading above $128, following a short term uptrend a few days prior.
- Last 15 minutes to closing, AAPL dropped like a brick, and closed $125.90 with 13 million shares trade.
- Next 15 minutes After Hours, 14 million shares were traded and it bounced back all the way up.
- Then, volume dropped dramatically after hours, and prices were made to hover around $126.4-$126.6.
What happened?
The coincidence with Quadruple Witching is too great to ignore. My personal belief (no proof, just trails left by the manipulators from price action, volume and open interest) is manipulation. AAPL dropped more than $2, who would gain? From stock perspective, heavy selling 13 million shares and heavy buckback of 14 million shares suggest very little price difference in the underlying stocks, perhaps less than 50 cents difference.
For a start, we note:
1. A $2 fall in closing price (from above $128 down to below $126) makes a massive difference in the value of all the ITM APPL calls. The number of Open Interest of all ITM Calls is massive, and I believe is very similar in size to 130,000 contracts (equivalent to 13 million shares). Even if the manipulators lost 50 cents in the stock market, they would gain $2 in the Options market in this segment alone.
2. In addition to the gain from the ITM calls sold, there are 3 specific Call Contracts that would expire worthless - the $128, $127 and $126 strikes, since AAPL managed to close just 10 cents below $126. Total Open Interest is sizeable, around 78,000 contracts at the start of the day. In just 1 day, volume traded = 132,000 contracts (equivalent to 13.2 million shares). Again, the Call Options Seller has a financial interest to see the price drop like a brick.
3. Don't just look at the Calls, consider the Puts too. Puts trading volume tend to be smaller than Calls when the stock has been rising for months. This is reflected in the smaller Open Interest. However, look at the massive Put Volume from just 1 day at the $128, $127 and $126 strike that would benefit from the underlying manipulation - the total volume there is 113,000 contracts (equivalent to $11.3 million shares). These Puts would normally be worth almost nothing in the quiet noon, but suddenly in the last 45 minutes, would have had a massive explosion in value at the close. The $128 strike with the largest volume of 56,000 contract is worth at least $2 extra, from a few cents - these are very likely high 3 digit or 4 digit absolute % returns within 1 hour.
Of course, I have no proof of manipulation. All I have is just the trail of stock prices, option prices, stock volume and Put/Call Option volume and Open Interest.
Do you think AAPL stock price action 15 minutes before and after closing was a coincidence?
Future Lottery Idea?
Is it possible to take advantage of Quadruple Witching? Could you design a positive expectancy trade from this?
Consider the $128 Put. It was probably worth a few cents a couple of days ago when the stock ran up to nearly $129. You might not want to buy all OTM puts with 1 day expiry, but perhaps you could filter it with volume, to follow the smart money - at that may point to $128, $127 strikes, which would look like it would expire worthless a few hours prior to closing. The win rate may only be very low, possibly 10%, but if you only do this during Quad Witch days, and follow the "smart money", could you have a positive expectancy system? For example, at $0.10, each contract is only worth $10 - you could speculate using $100 and the payoff may be in thousands $. In this situation, what is losing 2 to 4 trades of $100 each, if one win nets you $1,000 or more?
It would be a bit like buying lottery tickets - most would expire worthless, except here, instead of negative expectancy from lottery tickets, you may actually get positive expectancies.
Think about it ... why play lotteries when you can play the OTM options once a quarter with positive expectancy? *smile*
great Idea SH..at least have some chance to gain some bonus quarterly :-)
ReplyDeleteWell, it's more lottery than bonus, and there's a subtle difference. Lottery loses money most of the time, whereas bonus (eg employer bonus) doesn't cause one to lose money normally.
ReplyDeleteActually the post is for traders who also still regularly play Toto, 4D, etc and lose money from these negative expectancy systems. Personally I don't play these lotteries, I prefer to trade positive expectancy systems including those taught by Adam here - they are much more reliable than the lottery ideas. The second reason for the post is to illustrate that opportunities exist to convert normally negative systems into positive expectancy systems at the right price, risk, rewards, driven by careful selection of trades at the right timing. And the third reason is to point out the manipulations in financial market places for caution.
Cheers,
SH