Could the Nasdaq Re-Weight Be a "Non-Event" for Apple (NASDAQ:AAPL)?

About 18 months ago – On October 20, 2009, to be specific – I posed the question, “Is it Time to Re-Weight the Nasdaq 100?”* At that time, Apple AAPL shares had a 15.6% weighting in the 100-stock index (and by default, the Nasdaq-100 Trust).

At the time, I noted:

“…the relative outperformance of Apple (AAPL) shares in the past six years has created a situation that may be a call to action by the owner of the index, Standard & Poor's, to re-weight Apple shares in the index as Apple has now become the 1000-pound gorilla … S&P may see the need to reduce the Apple weighting in the NDX and the related exchange traded fund … to equalize the components. If this happens, indexers will be forced to lighten the number of shares they hold in Apple stock. So in essence, Apple could theoretically be penalized for its own success.”

In the ensuing 18 months – as Apple's stock price rose from $200 to around $340 – its weighting in the index grew as well, moving to 20.5%. While the iPhone parent's market cap has swelled to twice that of Google GOOG, its weighing in the NDX is now five times as great.

Turns out, the answer to my not-so rhetorical titular question was “Yes … but not yet.” I guess I just had to be patient. On Tuesday, the Nasdaq OMX said it would be doing just that – re-weighting its index to reduce the impact of Apple from 20.5% to a projected 12.3%. The rebalance will take effect in less than a month – on Monday, May 2.

Nasdaq plans to lower the respective weighting of about 80% of the index's members, while raising the weighting of 18 stocks. Most of the index members will see very minor changes. Some of the more notable boosts include:

Google GOOG – From 4.2% to 5.8%
Intel INTC – From 1.8% to 4.2%
Microsoft MSFT – From 3.4% to 8.3%
Oracle ORCL – From 3.35% to 6.7%

So will Apple now be “penalized for its own success?” Does the fact that the stock has risen much faster than its technology peers now work against it? Potentially. Indexed money managers who are required to adjust their investments to mimic the moves of the NDX itself will have to sell out of Apple shares and rebalance their own portfolios.

As a result, between now and May 2, we may see a lot of selling pressure on the stock. The Wall Street Journal reported that “more than 2,900 financial products [track] the Nasdaq-100 in 27 countries.” A drop in Apple's weighting from 20.5% to 12.3% is a huge change. However, looking at the QQQ technology ETF that tracks the NDX index, the notional value is currently $24.8 billion. If Apple shares currently make up 20.5% of this ETF, logically it follows that more than $5 billion of Apple stock is long. With the new weighting of 12.3%, only $3.05 billion of exposure to Apple is required.

Therefore, $2 billion of stock will need to be sold between now and the May 2 rebalance date. Divide that by the share price and you get a rough-and-dirty estimate of 5.9 million shares to be sold. This is only around 35% of average daily volume, so the actual impact to the shares may be a non-event. So what's an individual investor to do? Consider volatility strategies, perhaps. Investors expecting a lot of movement in Apple stock could look at long straddles/strangles, while investors who think things will be calmer than current volatility projects could look into short iron condors or straddles/strangles.

A straddle or strangle buyer risks the premium paid in exchange for potential unlimited gains if the stock rallies (and significant profits if the stock declines). Straddle and strangle sellers, on the other hand, have unlimited risk exposure and the maximum profit potential of 100% of the premium collected.

Iron condor sellers can potentially profit by the amount of the premium paid but stand to possibly lose the difference in option strikes (calls or puts, whichever is greater) less this premium. For example, someone selling the May 335/340/350/355 Apple iron condor for $2.90 can achieve maximum potential profit of $2.90 but faces the potential loss of $2.10.

*Note: This article originally appeared on a sister site.

Photo Credit: axelouuu

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