Unusual Activity in Apple Options Today Shows Investors Are Bullish on AAPL

Today, a Barchart report shows a large, unusual volume in Apple, Inc (AAPL) options, including out-of-the-money put options. They tend to show that investors are bullish on AAPL stock going forward.

AAPL stock is at $249.10 in midday trading today, down from $258.86 on April 6, and well off its recent peak of $274.23 on Feb. 25. One large tranche of out-of-the-money puts shows a good income play.

I wrote in a Feb. 9 Barchart article that AAPL stock could be worth $363 per share based on its strong free cash flow (FCF) over the next 12 months (NTM). Since then, analysts have raised their revenue projections.

Last year, Apple generated a 28.3% FCF margin according to Stock Analysis. As a result, with the same margin, FCF could reach $131.7 billion this fiscal year ending Sept. 30 (based on $465.4 billion in projected revenue). And next FY, FCF could rise to $140.7 billion (based on $497.17b in revenue forecasts).

Using a 40x multiple, Apple’s market cap could be worth $5.448 trillion (i.e., $136.2 billion avg FCF x 40). That’s 49% higher than its market cap today of $3.657 trillion, according to Yahoo! Finance.

In other words, the price target (PT) is 49% higher:  1.49 x $249.10 = $371.16 per share

However, just to be conservative, let’s use a 30x FCF multiple, equal to its historical P/E multiple over the last 5 years:

$136b x 30 = $4.086 trillion

That’s still 11.7% higher than today’s market cap. In other words, a near-term PT is $278.24 per share (i.e., 1.117 x $249.10).

The bottom line is that AAPL stock is worth somewhere between $278 and $371 over the next 12 months, or $324.50, or 30% higher.

Analysts tend to agree. For example, Yahoo! Finance shows that 48 analysts have an average PT of $295.32, and Barchart’s mean survey PT is $296.04.

Both of these are higher than 3 months ago, as seen in my Feb. 9 Barchart article. The Yahoo! Finance PT then was $292.70, and the Barchart PT was $292.81. However, Anachart.com’s survey PT has fallen from $290.80 to $290.54 today.

Nevertheless, analysts’ average price targets are well over today’s price, implying upside of ($292/249-1) +17% from today.

This could account for the large volume of Apple Inc put and call option activity today. It tends to show investors are bullish on AAPL stock.

This can be seen in today’s Barchart Unusual Stock Options Activity Report. Many of these AAPL option trades are for 1 to 3 days away. One tranche in particular is of note since it is longer dated and deep out-of-the-money. This can be seen in the table below.

It shows a large put option trade at the $200 strike price expiring in 45 days on May 22. Over 10,400 put option contracts traded at this strike price for a premium of $1.20 on average. This was almost 18x the prior number of puts outstanding.

That implies that a short-seller of these puts believes that this was a very attractive potential buy-in point. For example, the $200 strike price is almost 20% below today’s price (i.e., deep “out-of-the-money.”)

Note that the delta ratio is only 0.0675, implying just a 6.75% chance AAPL will drop to $200 in the next month and a half.

In other words, it’s a very safe bet. The short-seller collected a short-put yield of 0.6% ($1.20/$200.00) for a month and a half. That works out to an annualized yield of 4.8% (i.e., 8x 0.6%).

In effect, this is a very safe and bullish way to play AAPL’s potential upside. Note that this expiration is after Apple’s upcoming earnings release, expected on April 30. So, the institutional investor that initiated this trade has plenty of expiration time left after that for AAPL stock to react.

The bottom line is that AAPL stock looks cheap here, and one way to play it is to short deep out-of-the-money AAPL puts.

On the date of publication, Mark R. Hake, CFA did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. This article was originally published on Barchart.com