The Secret to Predicting Apples' Share Price

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The Secret To Predicting Apple's Share Price!

 
 

Predicting Apple's Share Price : the secret ATM PIN

The Challenge

What price will Apple's share price be at a specific time in the future?

Most traders and investors would love to know where Apple's share price will be at any specified time in the future.

Sounds impossible to know this without inside information or a time slip " Back to the Future" type book to reference.

The problem simplified

The truth is other than being the Market Maker or knowing his program we can not know at every general point of time in the future what any share price will be.

However through the magic of the world's largest single stock option markets' influence on Apple's share price we can form an idea as to the vicinity and or range that will be likely on the specific time that is the Option Expiry date. The expectation as to a specific price is called the "PIN". The expectation as to a range is called the "Max Pain". I have discovered and established in another article the general mathematical and precise relationship between the PIN price and the Max Pain range. This article seeks to provide a single specific real and amazing example of this forecasting technique.

Specifically what will Apple's share price likely be, or not, on the quarterly January Option Expiry date of Friday the 18th of January 2013 at close of market at 4 p.m.?

The first graph below displays visually the Open Interest for the January contract as at the 5th of November 2012, that is more than two months before the Expiry date.

What is noteworthy here is the large blue peaks representing huge Call option Open Interest numbers. Prosaically, at the $600 strike there were 59,000 Call Contracts open. Around the $650 strike there was a total of 164,000 Call Contracts open. And around the $700 strike there were a total of more than 166,000 Call Contracts open.

The first point to make that in the historical data there is evidence to show that the 59,000 Call Contracts at the $600 strike could be overcome. Difficult but with enough good news, strong sales evidence and no fiscal cliff headwinds, possible. There is no data to show that a barrier of 164,000 Call contracts such as that around the $650 strike could be overcome. Similarly for the $700 strike vicinity. Let me make this clear. Is it impossible for Apple's share price to close at 4 p.m. on said Friday above $650 or $700? No! But so unlikely as for practical purposes to be close to impossible.

(click to enlarge)

So from this chart which is merely a simple collation of the Open Interest numbers can we extract a likely close price, the PIN, or the range?

Many times there is a more clean cross of the Put Open Interest and Call Open Interest lines similar to a cross "X" shape. Those who place credence in this approach would say from this chart a price or PIN of around $615 or $595. For the range we could say a price lower than $700 with very high likelihood, a price lower than $650 with high likelihood, and a price near if not lower than $600 concordant with the large Call contract peaks.

For all you Apple lovers and bulls, please note this analysis can be viewed as just one specific moment when Apple's undoubtedly world class fundamentals are outweighed by exogenous factors as far as Apple's share price is concerned for the specific expiry moment.

Now here is another mathematical reinterpretation of the above raw numbers showing the cumulative total of Call and Put Open Interest contracts. The red line is my own simple yet derived single summary figure from the two figures for the Calls and Puts.

Again like the raw numbers many look, more appropriately perhaps for this data, at where the two lines intersect, which is the same as the minimum of my red line.

This view yields a price or PIN of $600.

(click to enlarge)

A further step is to look not at the raw numbers nor even their totals but add in some intelligence. That is the Max Pain theory says that the share price will close in the area that causes Maximum Pain to the Option buyers or Holders. Equivalently Max Pain may be restated mathematically as to say the share price will close in the area that causes the Maximum number of Options to expire worthless. This is certainly one definition of Pain. Here is a chart for the number of Options that are Out of The Money ( "OTM" ) for selected strikes. The Maximum number is at the $600 strike.

(click to enlarge)

Another related view is to look at the minimum number of Options expiring In The Money("ITM"), which of course is the obverse of the previous view. This chart also shows the minimum number of Contracts expiring as an assumed liability to the Option Market Maker as at the $600 price.

(click to enlarge)

Here is one single chart showing the data in the previous two charts combined into one chart.

(click to enlarge)

We can of course delve more deeply into the breakdown of these OTM and ITM numbers say as to the distinction between Calls and Puts. Please request the details.

For now though lets just say that though there are many people and sites that focus on the numbers, which may be ample for their purposes, I will just state that the world of finance does not run so much on quantity's as on dollar values. That is, not so much the share price at which the minimum number of option contracts expire in the money but much more the share price at which the minimum dollar liability assumed to the Option Market Makers or Writers occurs. This dollar value based price may be the same as the number value based price but usually it is not. Here is the chart for the assumed In The Money dollar values for the selected strikes.

(click to enlarge)

The minimum dollar value in this case is at the $600 price, though the $595 price is not significantly different.

What this chart shows for example is that if Apple closes at 4 p.m. on the 18th of January 2013 at $600 about $1 Billion USD assumed intrinsic value will exist.

Compare that with the price closing at say $675 with an in the money value of $2.5 Billion USD. 2.5 times greater liability to the assumed Market Maker as writer.

Another more telling way to think of this is that the writers could spend $1.5 Billion USD on pushing the share price down if they can , and they can, from $675 to $600. That is a little more than 2 million shares worth. Could an extra 2 million shares volume on the said day be enough to push the share price that far. The simple answer is yes. Although even this is academic because of a number of other hard reality's.

Further the bullish price of say $750 has been included to show just how high a cost this would be to the assumed writers and conversely how much money comparatively they could profitably throw at keeping the share price below that level.

Here is breakdown of the dollar value of options expiring in the money by Call and Put types. (click to enlarge)

My proprietary data moves this data up another whole universe.

For instance while I do not present the chart here, the assumed whole Book delta for this Expiry is closest to zero near the $600 price too.

This Book Net Delta gives in graphic share terms the sheer physical share volume forces on play on the share price at any particular price Apple's shares may find themselves at any time before and up to the expiry moment.

We have now looked at various ways of using the huge option market, with about 1 Million contracts due to expire on the 18th of January 2013, to forge a view of the likely closing price at 4 p.m. on said Friday. That price is likely to be around $600 on this data as of the data of the 5th of November 2012. Does this mean that Apple must close at $600 on this expiry?. No! Further foes this calculation mean that Apple's share price can not go above any specific level before the expiry? Again, no! For example it is possible and likely that without the alteration of this OI state that Apple's share price runs up to say $705 before the expiry and then "inexplicably" drops back under the relevant peak on or by 4 p.m. expiry Friday, only to resume its' previous upwards trend after expiry. Even more so, there are several other factors that will become more prominent as we get closer to the expiry moment. The most obvious is the very Open Interest numbers changing dramatically themselves. These Open Interest numbers change daily. In this case we could see the huge Call peaks reduce significantly providing far less upper price constraint. Conversely we could see huge Put peaks form near at or even moderately below these Call peaks. The Put peaks would balance out the value expiring as a cost or worthless depending on being the writer or buyer respectively. The closing days volume is also a huge factor. This was seen in the last monthly expiry let alone the last quarterly expiry. Also changes in the Implied Volatility smiles vis-a-vis the writers cost basis will have an effect too. So too Apples' holidays sales "leaks", naked sentiment and the general market status at the expiry time.

All those equivocations aside the exercise is valuable in that until these huge Call peaks are dealt with one way or the other Apple's share price as at 4 p.m. on Friday the 18th of January 2013 is very unlikely to be above $700, highly unlikely to be above $650 and quite likely to be in the vicinity of $600 in a fairly generous range say $575 to $640..

Now that is the magic of options and quant in the holy grail of attempting the impossible of forecasting a specific price at a specific time in the relatively, for intra-day traders anyway, distant future.

 


Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it . I have no business relationship with any company whose stock is mentioned in this article.

This article is tagged with: AAPL, Options and Open Interest
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