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Wednesday, Jan 16, 2013 2:00am
AAPL hits nine-month low; call options to blame?
In the wake of considerable media backlash over a highly-questionable Wall Street Journal story claiming that Apple had cut back orders on iPhone parts to "half" previous levels -- a claim now clearly shown to be inaccurate -- AAPL has dropped to its lowest price in nine months, closing on Tuesday at $485.92 (though it is up to almost $490 in after-hours trading). Evidence has now emerged that some investors may be deliberately trying to suppress the stock.

Disturbingly, the market seems to be quite prone to sometimes-blatant manipulation with regards to Apple -- there is a distinct lack of any hard evidence that anything is wrong either internally or externally with the company. Demand for its flagship product is reported widely to be "robust," and even consensus numbers by professional and indie analysts indicate that Apple is likely to have the best quarter in its history when it reports numbers for the holiday quarter on January 23.

Though it is true that competition has gotten more intense between (primarily) Apple and Samsung in the smartphone market, and a handful of other competitors in the tablet arena, there is nothing to suggest that Apple is not still making (by far) the largest share of profits in the mobile industry, or that its products aren't selling as well -- or better -- than ever. Wall Street expectations for iPhone sales during the holiday quarter are in the 47M range, and half that much for iPads, both record numbers with double-digit growth. Even if Apple manages to miss those targets, sales will be up significantly from both the previous quarter and the year-ago quarter by at least 20 percent.

The WSJ article that appears to have triggered the latest steep drops in AAPL were apparently based on completely made-up numbers of parts attributed to unnamed sources in the Japanese stock market. The article has since been lambasted in other mainstream business magazines, including The New York Times and Forbes. While there is still the possibility of sales or production erosion at Apple, press reports on the matter have taken on a "whisper campaign" quality with no real evidence behind them, and an over-reliance on speculative quotes from pundits and analysts.

A previous press release, also widely reported, quoted a study that claimed that the teen demographic was disenchanted with the iPhone and hot for Microsoft's Surface tablet and Galaxy phones, the former notion completely unsupported by sales figures or reality. Clearly-influenced "surveys" and suspiciously-timed "reports" aimed at taking the shine off the single most popular brand of smartphone and tablet have expanded greatly in just the past couple of weeks, egging on a price drop in the stock that has accelerated from a slow correction-type decline over the previous three months.

The charges of manipulation don't just come from Apple's fans and customers -- stories about Apple regaining US smartphone share over the combined Android field of competitors are buried beside claims of new (relatively) high sales records for Windows Phones and Samsung's Galaxy line, leading to rises in the stock price of those companies -- even though the latter took nearly five times times (and several model revisions) as long to sell the same number of phones Apple typically sells in six months.

The incredibly poor sales of Microsoft's Surface tablet are glossed over, likewise giving MSFT a slight lift in the new year. The decision by Samsung not to even offer RT-based tablets in the US did not cause any drop in either Samsung or Microsoft's stock, and the sales totals by even the most successful vendors of Windows Phone 8 and Android models pale in comparison to Apple's totals until taken as one aggregate number.

There was even a recent story about HTC cutting component orders for its products, and Microsoft selling only one million Surface units -- about half as many as expected -- over the holidays, but did the stock plummet? No, both have steadily gone up (albeit slowly) since November. Meanwhile, no clear explanation of why that would be has yet emerged.

An analysis of call options from the summer that are coming due in the next few days by Seeking Alpha may reveal some answers, possibly including factors that are illegally -- but deliberately -- attempting to suppress AAPL price temporarily, until around the time of the company's earnings announcements. As it turns out, billions of dollars are at stake in some 60,000 call-option "bets" that AAPL will be in the $550 to $700 or higher price range on January 19, a now-remote possibility given the increasing downward pressure on the stock that has ramped up over the last two weeks.

If the options expire as worthless (AAPL is below the strike price), then institutional money managers who wrote the call options last summer and bought the common stock (at its then range of $600 or so six months ago) to cover the bet will save at least $600 million in payouts. On the other hand, if the stock should rise back up significantly above $600 after January 19 -- say just before or shortly after Apple announces its earnings -- they keep the money they made selling the call option and any capital gains on the stock they are currently holding. The sum total amount of difference would be in the billions of dollars in net gain overall.

If forces are conspiring to suppress the value of Apple stock, the 60,000 call options that expire on January 19 will cause a strong rise in the price as the large-volume buyers grab more stock in an effort to ride presumed good news back up to pre-October levels. The theory will prove itself (or not) early next week, and if the prediction is correct and events unfold as described, a case could be made for an SEC investigation into some of the larger institutional buyers of AAPL and their motivation to influence the stock's behavior.

Other possibilities that similar support manipulation charges including the possibility that the suppression was aimed at getting nervous smaller investors to dump the stock so that larger, institutional buyers can gather more at lower prices, which is also illegal. What happens to AAPL over the next two weeks will likely tell the tale. [Chart via SeekingAlpha]