Apple investors pay more for downside bets

Apple, with a market value of more than $425 billion, is the most valuable U.S. company. Its stock price has fallen 35.5 percent since its closing peak of $702.10 on September 19, 2012.

The loss occurred even as the S&P 500 Index gained nearly 6 percent in that period to close within a few points of all-time highs.

The stock's weakness suggests a shift in how the stock market views the maker of the iPad and the iPhone. That also seems to be evident in the options market, where the value of Apple puts when compared with the value of its calls has reached multi-year highs even while open interest has declined.

"The decline in Apple over the past several months has obviously triggered some concern, as the Put/Call (value) Ratio has spiked beyond levels that have been seen at any time in four years," said Jason Goepfert, president of SentimenTrader.com, in a report. "It's well above the level seen when Apple bottomed in 2009."

The stock has fallen in part on worries about demand for Apple's mobile devices as competition intensifies from Samsung Electronics Co Ltd and others using Google Inc's Android software.

Options investors have been paying more for bearish put options on Apple, compared with calls, since October last year except for the brief period at the end of 2012, when the stock popped up to $594, according to institutional research firm Phil Erlanger Research in Acton, Massachusetts.

Investors who worry about a slide in stock prices can protect themselves by buying equity puts, which give them the right to sell the stock at a fixed price by a certain date.

Conversely, an equity call conveys the right to buy a stock at a pre-set price by a certain date.

Watch that ratio
On March 13, the put-to-call value ratio on a 10-day median basis reached a high of 3.2, a level not seen since October 2008 during the financial crisis, said Phil Erlanger, president of Phil Erlanger Research.

That means the puts' dollar value was 3.2 times more than the dollar value of the calls. Under normal circumstances, when Apple's stock price has been in an uptrend, the value of the calls far outweighed that of the puts, Erlanger said.

"Overall, the relative strength for Apple has been weak, and so the excess of put activity we saw earlier this month is set up for at least a short-term bounce in the stock, which is under way," Erlanger said. "That ratio has come off a bit, to a reading of a 2.07 as of Wednesday's close."

Apple's stock rose 0.14 percent, or 65 cents, to end on Thursday at $452.73.

The number of outstanding bearish positions on Apple is not as great as it was in September, however. Existing put positions were 1.06 million contracts as of Thursday morning, a 30 percent drop from September, according to options analytics firm Trade Alert. Call open interest was 1.8 million contracts, down about 10 percent from September.

There are two reasons for this trend, said Trade Alert president Henry Schwartz. The demand for hedges for Apple appears to be reduced since the stock has already fallen sharply. In addition, a large part of the call open interest is far out-of-the-money, which skews the ratio of open interest because those contracts are rarely liquidated, Schwartz said.

© Thomson Reuters 2013