Was Apple’s $40 blowout Friday a massive short squeeze?

At the end of the trading day, each of these Apple contracts had gained 840% or more. There were two sides of each of those trades.

apple msssive short squeeze

My take: I’m having a hard time right now wrapping my head around these numbers. My gut feel is that there was big money in the Apple options market Friday scrambling to cut its losses. Can someone with a better grasp of how those markets work explain what just went down?

7 Comments

  1. David Emery said:
    I love a good Short Squeeze!

    3
    August 1, 2020
  2. David Drinkwater said:
    If this is a “losers walk” situation, then I am all good with it.

    0
    August 1, 2020
  3. David Baraff said:
    I can’t necessarily explain, but I bought more AAPL common about 2 weeks ago as the price was climbing because I was effectively “short”. Some weeks ago, with the price down around $340, I sold some covered calls at $400 (expiration August 21).

    As the price kept climbing, at a certain point I realized I was in real danger of having my common AAPL called away at $400 on August 21. So, to “hedge” against this, I bought extra AAPL common (at around $378) as we were climbing through there, one share for each call I had sold.

    This hedges me, because as those sold options increase in value (which is how much i have to pay to get out of that bad position) my extra APPL common increases in value, nulling out my bad options sale. (Obviously, the price of APPL might decrease of course, and then I’m stuck with AAPL common below what I paid for it. But that’s OK, because I’m optimistic over time it’ll come back up.) While the options have a finite life time.

    So effectively, the rising price “squeezed” me into buying more shares, to hedge against my foolish options position. Come August 21, those extra shares I bought may get called away, but that’s ok. Or maybe we’ll close between $378 and $400 and I sell the stock on my own and put the cash that was tied up back in the “ready to fire” pool. Or something in between.

    4
    August 1, 2020
  4. Peter Kropf said:
    Hi Phillip,

    If you want to see the real squeeze, check out the movement for those same target prices which expired 2 days ago on Jul 30th. It’s sick.

    Can someone post them? I’m guessing the gains will 1500% or more.

    0
    August 2, 2020
  5. Kathy Corby said:
    True that for each buyer of a call, there is a seller. It does not follow, though, that each seller of the calls that changed hands before the earnings was “ruined”. One of the commonest hedges before earnings, where the stock is perhaps just as likely to drop in value as to rise, is to sell calls against shares— essentially getting paid to wager that the stock will not rise to the price agreed upon. In this case, the seller pockets the money, known as “premium”, and still gets to keep the stock. If the stock declines, the loss is partially compensated by the sale price of the calls, which “expire worthless.” This is often a safe strategy— for few stocks rise so rapidly that one ever actually needs to make good on the promise to relinquish one’s shares, if the agreed upon price is far from the price before earnings.
    However, the dubious practice of selling a call which is not “covered” by shares, known as selling “naked calls”, is a recipe for disaster in the case of an outcome such as Apple presented to us. This strategy is recommended by some unscrupulous or ignorant options “advisors”, for if the stock rises and one does not have shares to relinquish, one must buy them on the open market before the expiration— at whatever price they are trading at. Sellers of naked options can have accounts wiped out, and is one reason why many investors see options as “risky” rather than as prudent instruments to leverage capital responsibly.

    2
    August 2, 2020
  6. Kathy Corby said:
    And, finishing the thought— Generally, buying calls that are far out of the money (above the price at which the stock is trading) is not a prudent use of capital, for these rarely pay off: even if the stock rises in price, the value of the calls declines unless the stock is farther above the agreed upon price to overcome the cost of the calls. So the buyers of those calls either had advance knowledge of the earnings about to be announced (SEC, are you listening?) or know what it means to be “better to be lucky than smart.”

    0
    August 2, 2020

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