Analysis: Apple, Facebook options reflect hopes for stock gains

Fri Oct 25, 2013 6:11pm EDT
 
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By Doris Frankel

(Reuters) - The options market is reflecting a higher probability of large upside moves in Apple Inc and Facebook Inc stock when both companies report quarterly earnings next week.

Stock of Apple - the largest U.S. company by market value - is down 1 percent since January 1 while Facebook shares are up 95 percent.

Many investors appear to be speculating on a rally rather than a sell-off in both stocks and are turning to the options market, buying calls at strike prices that are far above the current share price - also known as "out-of-the-money." These are relatively more expensive than out-of-the-money puts.

The situation is unusual, because investors are typically more concerned about downside risk and are willing to buy "disaster puts" - far out-of-the-money puts - at a higher relative price. This is because they do not want to lose a lot of money if the stock gets hit, said Steve Place, a founder of options analytics firm investingwithoptions.com in Austin, Texas.

"When we think about risk in the stock market, it's normally about the downside," he said. "People are scared about the downside risk."

Call options are a contract that gives the right to buy a stock at a fixed price by a certain date, while a put gives investors the right to sell a stock at a preset price.

"Both (stocks) continue to have inverted skew, indicating options traders believe a sharp move higher is more likely than a sharp move lower," said Matt Franz, investment adviser representative at Stutland Volatility Group in Chicago.

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A worker wipes a poster advertisement for Apple's iPhone 5C on a wall of Japan's biggest mobile phone operator NTT Docomo Inc shop before its launch ceremony for the start of the selling of Apple's iPhone 5S and 5C at its shop in Tokyo, September 20, 2013. REUTERS/Yuya Shino