The day the market lost faith in Apple

  • Posted: 13 January 2011 07:51 PM #76

    BillH - 13 January 2011 10:51 PM
    Mace - 13 January 2011 09:42 PM
    BillH - 13 January 2011 08:10 PM
    dotdash - 13 January 2011 07:36 PM

    The AAPL p/e mystery may be partially explained by the ballooning popularity of options in the last 3 or 4 years. P/E is based on shares outstanding and does not take into account options. It would seem open interest should be taken into account when determining the premium placed on a stock.

    AAPL has some of the highest ratios of open interest to shares outstanding. For instance, today for AAPL, the ratio of all open call contracts to shares outstanding is 10.03M/917.31M (1.09%). For AMZN it is 2.18M/448.84M (0.49%). These are contracts which represent 100 shares per contract. Note this means there are more optioned shares of AAPL than there are shares outstanding. Interesting!

    Options also serve to dilute the demand for common. Further study should be done on valuation of all call contracts. That would show dollar interest in AAPL that is not in common shares.

    Someone with better analytical skills than I may want to consider metrics of valuation which take options into account.

    Ding ding ding.  I think we have the winning entry here.  Which sucks.  :(

    rolleyes.  Demand of shares are affected by the net difference between OI of calls and puts.

    But we’re talking about valuation or am I not understanding something.

    First, I misunderstood the CBOE tables I was using which makes the open interest quotes off by nearly an order of magnitude. However the ratio of call options in AAPL to AMZN is still valid.

    New numbers (OI call contracts/common):
    AAPL 1.012M/917.31M (0.11%)
    AMZN 0.226M/448.84M (0.05%)

    My point about demand was in the context of “supply and demand”. You have a supply of investment dollars and a set of investment instruments to apply the dollars against. If the investors choose to place their dollars in options rather than common then the demand for common suffers and the price will reflect the soft demand. So the “price” in P/E ignores an increasingly large proportion of dollars invested (options).

    Its not clear to me how puts factor in. Do puts subtract from the total value of the investment? That doesn’t sound right to me either.

    I have to believe there is metric which includes options which explains the apparent lack of P/E premium in AAPL. I believe the premium is spread between options and common.

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  • Posted: 13 January 2011 08:16 PM #77

    dotdash - 13 January 2011 11:51 PM

    First, I misunderstood the CBOE tables I was using which makes the open interest quotes off by nearly an order of magnitude. However the ratio of call options in AAPL to AMZN is still valid.

    New numbers (OI call contracts/common):
    AAPL 1.012M/917.31M (0.11%)
    AMZN 0.226M/448.84M (0.05%)

    My point about demand was in the context of “supply and demand”. You have a supply of investment dollars and a set of investment instruments to apply the dollars against. If the investors choose to place their dollars in options rather than common then the demand for common suffers and the price will reflect the soft demand. So the “price” in P/E ignores an increasingly large proportion of dollars invested (options).

    Its not clear to me how puts factor in. Do puts subtract from the total value of the investment? That doesn’t sound right to me either.

    I have to believe there is metric which includes options which explains the apparent lack of P/E premium in AAPL. I believe the premium is spread between options and common.

    I’m not a finance grad. (architecture) nor do I play one on TV nor did I stay at a Holiday Inn Express last night so feel free to ignore what follows.  wink  My understanding was that you were saying that there were more optioned shares (typically granted to senior executives and board members) than shares outstanding which is what drew my comment.  Given the rise in price it would be safe to assume those options will be exercised no?  If that were the case I’d view the stock as if it had been split in two (except someone else has my doubled shares).  I’m not expecting anyone to hold a seminar to educate us commoners but I’d like to have the essence of it straight in my head.

    [ Edited: 13 January 2011 08:18 PM by BillH ]

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    Posted: 13 January 2011 08:21 PM #78

    dotdash,

    For options, the counter-party is MM who would long underlying + buy put when he sells a call to retail investor like us, and short underlying + long call when he sell a put to retail investor like us.  This is to remain delta neutral and neutralize the Greeks so they earn only the difference between bid/ask.  I think you guys can deduce from here why the demand of shares are affected by net difference of OI of calls and puts.  Note:  Long underlying=Long call + Short put.


    Lstream,

    I subscribe to Fisher’s theory and have told AFB about this Fisher’s principles moons ago.  So we share the same attitude.  Having said that, what kind of bad changes can you think of?  TanToday listed these before:

    a.  Apple discounts or cheaper devices (he means a piece of junk with low margin not those intended to prevent price umbrella with reasonable good margin);
    b.  Raising % revenue from download, give developers less; and
    c.  Big acquisitions.

    Obviously, also when SJ not around in Apple.  Take note that only 5% survive a pancreatic cancer operation after five years.  SJ’s operations are done in 2004 and 2009.


    BillH,

    Not sure why you ask that question.  Just in case you don’t know, valuation of share is affected by company’s fundamentals, amount of outstanding shares, float, macro conditions and money supply*.  *not just in US, if listed elsewhere, that country’s money supply or other nationalities are allowed to trade in US stock exchanges, many other possibilities, essentially means how much monies available to buy equities.  In AFB, we focus mostly on company’s fundamentals.

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  • Posted: 13 January 2011 08:57 PM #79

    dotdash - 13 January 2011 07:36 PM

    Options also serve to dilute the demand for common. Further study should be done on valuation of all call contracts. That would show dollar interest in AAPL that is not in common shares.

    Someone with better analytical skills than I may want to consider metrics of valuation which take options into account.

    Wow this is a very interesting thought and from a personal perspective probably quite true.

    My investment company as an example holds 2,500 AAPL heads and 20,500 (205 contracts) 2012 call leaps and 8,700 (87 contracts) 2013 call leaps.  As a long term AAPL investor I see no reason to hold many heads as the leverage in options can provide greater returns and a range of strikes in LEAPS provides an element of protection against short term volatility.

    If there where not options available I’d probably have something in the order of 10,000 heads instead of only 2,500.  This had got to reduce the demand for heads and hold back the price vs investor expectation.

    Great incite!

         
  • Posted: 13 January 2011 09:00 PM #80

    Mace - 14 January 2011 12:21 AM

    dotdash,

    For options, the counter-party is MM who would long underlying + buy put when he sells a call to retail investor like us, and short underlying + long call when he sell a put to retail investor like us.  This is to remain delta neutral and neutralize the Greeks so they earn only the difference between bid/ask.  I think you guys can deduce from here why the demand of shares are affected by net difference of OI of calls and puts.  Note:  Long underlying=Long call + Short put.

    I want to make sure I understand this. When I buy 1 call contract the MM buys 100 shares of common (at current price?) in order to have the shares on hand in the event I exercise my option, correct? Likewise when I buy 1 put contract the MM will sell 100 shares of underlying. Thus the affect the options market has on common is the difference between call and put open interest.

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  • Posted: 13 January 2011 09:04 PM #81

    BillH - 14 January 2011 12:16 AM
    dotdash - 13 January 2011 11:51 PM

    First, I misunderstood the CBOE tables I was using which makes the open interest quotes off by nearly an order of magnitude. However the ratio of call options in AAPL to AMZN is still valid.

    New numbers (OI call contracts/common):
    AAPL 1.012M/917.31M (0.11%)
    AMZN 0.226M/448.84M (0.05%)

    My point about demand was in the context of “supply and demand”. You have a supply of investment dollars and a set of investment instruments to apply the dollars against. If the investors choose to place their dollars in options rather than common then the demand for common suffers and the price will reflect the soft demand. So the “price” in P/E ignores an increasingly large proportion of dollars invested (options).

    Its not clear to me how puts factor in. Do puts subtract from the total value of the investment? That doesn’t sound right to me either.

    I have to believe there is metric which includes options which explains the apparent lack of P/E premium in AAPL. I believe the premium is spread between options and common.

    I’m not a finance grad. (architecture) nor do I play one on TV nor did I stay at a Holiday Inn Express last night so feel free to ignore what follows.  wink  My understanding was that you were saying that there were more optioned shares (typically granted to senior executives and board members) than shares outstanding which is what drew my comment.  Given the rise in price it would be safe to assume those options will be exercised no?  If that were the case I’d view the stock as if it had been split in two (except someone else has my doubled shares).  I’m not expecting anyone to hold a seminar to educate us commoners but I’d like to have the essence of it straight in my head.

    The options I am referencing are not those granted to employees but contracts bought and sold on the exchanges.

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  • Posted: 13 January 2011 09:38 PM #82

    Mace - 14 January 2011 12:21 AM

    BillH,

    Not sure why you ask that question.  Just in case you don’t know, valuation of share is affected by company’s fundamentals, amount of outstanding shares, float, macro conditions and money supply*.  *not just in US, if listed elsewhere, that country’s money supply or other nationalities are allowed to trade in US stock exchanges, many other possibilities, essentially means how much monies available to buy equities.  In AFB, we focus mostly on company’s fundamentals.

    It’s the outstanding shares as you suggest above.  The PE is calculated on the number of shares in circulation but if in fact options to Apple personnel total more than the shares currently in circulation one would have to look at the PE in an entirely different manner.  Given that he said he mis-counted those shares by “orders of magnitude” it’s all rather academic.  As I stated earlier this was a thread about PE ratio’s which should have little to do with puts/calls and a lot more to do with the anticipation or lack thereof growing revenue streams and the profits derived from them.

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  • Posted: 13 January 2011 09:42 PM #83

    dotdash - 14 January 2011 01:04 AM
    BillH - 14 January 2011 12:16 AM
    dotdash - 13 January 2011 11:51 PM

    First, I misunderstood the CBOE tables I was using which makes the open interest quotes off by nearly an order of magnitude. However the ratio of call options in AAPL to AMZN is still valid.

    New numbers (OI call contracts/common):
    AAPL 1.012M/917.31M (0.11%)
    AMZN 0.226M/448.84M (0.05%)

    My point about demand was in the context of “supply and demand”. You have a supply of investment dollars and a set of investment instruments to apply the dollars against. If the investors choose to place their dollars in options rather than common then the demand for common suffers and the price will reflect the soft demand. So the “price” in P/E ignores an increasingly large proportion of dollars invested (options).

    Its not clear to me how puts factor in. Do puts subtract from the total value of the investment? That doesn’t sound right to me either.

    I have to believe there is metric which includes options which explains the apparent lack of P/E premium in AAPL. I believe the premium is spread between options and common.

    I’m not a finance grad. (architecture) nor do I play one on TV nor did I stay at a Holiday Inn Express last night so feel free to ignore what follows.  wink  My understanding was that you were saying that there were more optioned shares (typically granted to senior executives and board members) than shares outstanding which is what drew my comment.  Given the rise in price it would be safe to assume those options will be exercised no?  If that were the case I’d view the stock as if it had been split in two (except someone else has my doubled shares).  I’m not expecting anyone to hold a seminar to educate us commoners but I’d like to have the essence of it straight in my head.

    The options I am referencing are not those granted to employees but contracts bought and sold on the exchanges.

    In other words they’re non-dillutive in which case the impact on the PE ratio should be nil.

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    Posted: 14 January 2011 01:17 AM #84

    dotdash - 14 January 2011 01:00 AM
    Mace - 14 January 2011 12:21 AM

    dotdash,

    For options, the counter-party is MM who would long underlying + buy put when he sells a call to retail investor like us, and short underlying + long call when he sell a put to retail investor like us.  This is to remain delta neutral and neutralize the Greeks so they earn only the difference between bid/ask.  I think you guys can deduce from here why the demand of shares are affected by net difference of OI of calls and puts.  Note:  Long underlying=Long call + Short put.

    I want to make sure I understand this. When I buy 1 call contract the MM buys 100 shares of common (at current price?) in order to have the shares on hand in the event I exercise my option, correct? Likewise when I buy 1 put contract the MM will sell 100 shares of underlying. Thus the affect the options market has on common is the difference between call and put open interest.

    Correct except MM buys 100 shares + 1 put not just 100 shares.

    Long call = Long underlying + Long put

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  • Posted: 14 January 2011 10:58 AM #85

    Mace - 14 January 2011 05:17 AM
    dotdash - 14 January 2011 01:00 AM
    Mace - 14 January 2011 12:21 AM

    dotdash,

    For options, the counter-party is MM who would long underlying + buy put when he sells a call to retail investor like us, and short underlying + long call when he sell a put to retail investor like us.  This is to remain delta neutral and neutralize the Greeks so they earn only the difference between bid/ask.  I think you guys can deduce from here why the demand of shares are affected by net difference of OI of calls and puts.  Note:  Long underlying=Long call + Short put.

    I want to make sure I understand this. When I buy 1 call contract the MM buys 100 shares of common (at current price?) in order to have the shares on hand in the event I exercise my option, correct? Likewise when I buy 1 put contract the MM will sell 100 shares of underlying. Thus the affect the options market has on common is the difference between call and put open interest.

    Correct except MM buys 100 shares + 1 put not just 100 shares.

    Long call = Long underlying + Long put

    Appreciate the explanations. They don’t provide this level understanding with the cboe online seminars.

    So this put that the MM buys must somehow be different from the contract offered to retail otherwise you get into an infinitely recursive transaction, right? Does this put register in the OI for the corresponding put strike price?

    I would like to understand the money flow because I still feel the earnings growth premium is being expressed in the options transactions rather than common transactions.

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  • Posted: 14 January 2011 12:18 PM #86

    Steve Jobs’ gaunt appearance is/was the culprit. Even though the company continued to execute when Steve took his leave for the operation, Wall Street ties Apple’s value inexorably to Steve Jobs, warranted or not.

    I remember seeing him on tv that day and thinking that he was vrey thin.  “Steve is not well”, I thought to myself.  When I didnt realize that this was a tradeable notion still haunts me, because apparently ever other Apple shareholder did.  I took that very uncomfortable ride from 200 to 80 and have since taken it right back up.

         
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    Posted: 15 January 2011 08:50 PM #87

    Surprisingly nobody bring up that there are other stocks that are offering better deals, hence less monies chasing AAPL and hence P/E is lower than historical and has less premium over S/P.

    Eric Landstrom -  No longer believe above?  No more good deals?

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    Posted: 15 January 2011 08:55 PM #88

    Many of us here chase growth, and disciplined growth at that.  No company I know is better at that than Apple, which is why it gets most of my attention.  Moderate-high risk, moderate-high reward.

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    Posted: 15 January 2011 11:53 PM #89

    Another possible explanation is S&P companies are from loss to making less $ than pre-crisis, and we know that Wall Street works on hope i.e. for the same post-crisis profit, post-crisis PE (going from loss to post-crisis profit) would be higher than pre-crisis PE (from x to post-crisis profit).  Since Apple is making $ all the time, PE relative to S&P would drop.  Hence, the drop in AAPL PE relative to S&P is not due to Wall Street losing faith in AAPL, is because companies such as BAC is making $ from previous loss.

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