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Interesting AAPL Price Change Pattern

For several weeks now, I have been sharing my thoughts about trading options in Apple (AAPL).   During this time, two actual portfolios we carry out at Terry’s Tips have averaged double-digit gains every week.  No wonder we love the stock.

Today I would like to share something we have noticed about how AAPL fluctuates in price during the week, and a likely explanation for this pattern.

Interesting AAPL Price Change Pattern

We carry out two actual portfolios at Terry’s Tips which use AAPL as the underlying stock.  Many of our subscribers mirror these trades in their own account or have thinkorswim execute trades for them through their Auto-Trade program.  (By the way, this Auto-Trade program will not be available for new thinkorswim clients until after the May options expiration due to their integration with TD Ameritrade.)

The first portfolio is called William Tell.  It uses what we call the Shoot Strategy (as in shoot for the moon).  It is different from our major strategy which does not try to guess which way the market is headed.  The Shoot Strategy is designed to significantly outperform the purchase of stock for a company you believe is headed higher.  Since we selected AAPL as the underlying, you can guess why we call this the William Tell portfolio.

Last week, as you probably know, was a great one for AAPL.  It shot up by $34.13 (5.7%).  Our William Tell portfolio gained a whopping 37.4%, or about 6 times as great a change as the stock enjoyed.  Since we started the William Tell  portfolio on April 9, 2010 (exactly two years ago today), the stock has gone up by 137% while our portfolio has gained 810%, almost 6 times greater than the stock went up.  This is not just a hypothetical gain.  It is in an actual account and includes all commissions.

The second portfolio that currently uses AAPL as the underlying is called Terry’s Trades.  It was started in October 2011 to mirror the same trades that I am making in my personal account.  In the first few months of operation, this portfolio invested in strangles and straddles on SPY and the Russell 2000 (IWM), and some volatility plays (trading XIV and VXX), and about two months ago, switched to trading AAPL options (mostly buying the first month out and selling Weeklys against those long positions).

In the six months of operation for the Terry’s Trades portfolio, it has gained 294%, after commissions, of course.  Much of this gain was due to the recent performance of the AAPL options.

Over the last two months, we have noticed an interesting pattern in how the price of AAPL changes (and checking back over the past several months for the monthly expiration Fridays).  The pattern is simply that on Fridays, the price of AAPL often falls, and on Mondays it goes back up.  A week ago, March 30, it fell $10, and on Monday, April 2, it rose by almost that exact same amount, for example.

There may be a simple explanation for this pattern (by the way, the pattern was even more consistent on the third Fridays of the month when the monthly options expire).  Many people are bullish on Apple, but the cost of the stock is so expensive that they only have enough cash to buy calls on the stock rather than the actual shares.  When more people are buying calls than they are puts (as is the case in AAPL options), the people who are selling those calls are the market makers.

Market makers (I know, since I used to be one) seek at all times to have a delta-neutral portfolio which means that they want to be in a position where they don’t care whether the stock goes up or down.  If they end up with a large number of short calls in their account, the easiest way to balance their risk is to buy stock.  When they go into the market and buy stock, the price naturally rises.

On Fridays when the Weekly calls expire (and more importantly, on those third Fridays when the regular monthly options expire), the market makers are no longer short all those calls, and they can sell the stock to balance out their portfolios.  When they do this, the stock falls in price.  On Monday, new call buying might take place, and they once again have to go into the market and buy stock to balance things out once again.

We don’t know for certain that this is what is happening, but the pattern is quite persistent.  We have been taking advantage of this pattern in our portfolios.  On March 30, for example, when we normally roll our short Weekly calls over to the next week, we did nothing.  Instead, we waited until Monday to sell new calls, and when we did, the price of the stock had gone up almost $10, and we got much higher prices for the calls that we sold.

Happy trading if you choose to duplicate what we are doing.  Of course, you should never risk money that you can’t afford to lose.

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