How Option Traders Are Playing Apple As Trade War Ramps Up

Trade tensions between the U.S. and China are once again seemingly at new highs after China retaliated to the latest U.S. trade tariffs by allowing the yuan to devalue to new lows against the dollar and cutting off buying of U.S. agricultural products.

Apple, Inc. AAPL has been in the crosshairs of the trade war due to its high visibility and exposure to China, and several options traders with deep pockets adjusted their positions on Monday.

The Trades

On Monday morning, Benzinga Pro subscribers received an option alert related to four unusually large Apple trades.

• At 10:11 a.m., a trader sold 534 Apple call options with a $192.50 strike price expiring on Friday at the bid price of $5.901. The trade represented an $315,133 bearish near-term bet.
• At 10:14 a.m., a trader bought 2,469 Apple put options with a $187.50 strike price expiring on Friday at the ask price of $1.301. The trade represented an $321,216 bearish bet that Cirrus will be trading at or below $186.20 by the end of the week.
• At 10:25 a.m., a trader bought 1,800 Apple call options with a $202.50 strike price expiring on Friday at the ask price of $1.081. The trade represented an $194,580 bullish bet that Apple will be trading at or above $203.58 by the end of the week.
• At 11:37 a.m., a trader bought 3,243 Apple call options with a $200 strike price expiring on Friday at the ask price of $1.361. The trade represented an $441,372 bullish bet that Apple will be trading at or above $201.36 by the end of the week.

All together, the four large Apple option trades represented a net bearish bet of less than $400.

See Also: Market Sell-Off Accelerates Following China Trade War Retaliation

Why It's Important

Even traders who stick exclusively to stocks often monitor option market activity closely for unusually large trades. Given the relative complexity of the options market, large options traders are typically considered to be more sophisticated than the average stock trader.

Many of these large options traders are wealthy individuals or institutions who may have unique information or theses related to the underlying stock.

Unfortunately, stock traders often use the options market to hedge against their larger stock positions, and there’s no surefire way to determine if an options trade is a standalone position or a hedge. In this case, given the relatively modest size of the Apple option trades by institutional standards, they are unlikely to be professional hedges.

See Also: How To Read And Trade An Options Alert

Volatility Ahead?

Despite the heavy selling pressure that has driven Apple shares down 7.3% in the past week, it may not be coincidence that the largest Apple option trades on Monday resulted in almost a perfectly net neutral position. If the trades all came from the same source, the trader may be betting on volatility in Apple shares this week rather than committing to a bullish or bearish stance.

If all four trades came from the same trader, they may be a form of a straddle, a common option trading strategy in which a trader buys an equal number of calls and puts for the same stock and the same expiration date.

In this case, the trader bought $320,000 of $187.50 puts and $630,000 of $200/$202.50 calls. Apple is currently trading at around $194, and all those options will expire worthless unless the stock makes a big move up or down sometime this week. During a straddle trade, the direction isn’t as important as the size of the move.

Of course, the four trades could certainly have come from multiple sources as well. If that’s the case, the fact they are so evenly distributed among bullish and bearish trades is simply a reflection of how undecided the market is at the moment about whether the Apple sell-off is a near-term buying opportunity or a warning sign of things to come.

Apple's stock traded around $193.05 per share at time of publication, down 5.4%.