Stock Split Craziness

by JDH on August 29, 2020

I said last week that I would get back to a discussion of gold this week, but I won’t, other than to say gold is doing fine, building a solid base above $1,920, which presumably will propel it on its next run well above $2,000.  I have my position, I may add on pullbacks, but for now I am well positioned and happy to ride it out.

Of more immediate interest is the crazy action in Apple and Tesla, two stocks that start trading on a split-adjusted basis on Monday August 31.  My thoughts are well documented on Tesla, (I think it will be looked back on as the most spectacular stock collapse in history, but I have been completely wrong so far, so I have no position, and I am content to watch from the sidelines), so let’s instead look at AAPL – Apple Inc.

As I said last week discussing the silly season for Apple, Apple begins trading on Monday after a 4 for 1 stock split, so the close around $500 on Friday should equate to $125 on Monday.

As you can see from the one day chart of Apple on Friday, an hour before the close it was trading at $500, then bounced to $505, than “crashed” into the close to close at $499.18.

Of greatest interest to me are the crazy option premiums in Apple.  For example:

On Wednesday August 26, when Apple was trading around $504, I did a covered write, and sold the Apple call options with a strike price of $515 expiring at the end of the day on Friday August 28.  So, someone was betting that in less than two days Apple would go up by more than $11, or over 2%.

Most amazingly, I sold the options for $4.11, so to break even, ignoring commissions, the buyer of those options would need Apple to hit $519.11 in just over 2 days.  For context, Apple’s all time high, reached on August 24, was $515.14  So, someone was willing to bet that Apple would go up by over 3%, to an all time high, in less than 3 days.

That’s a not-totally impossible but still crazy bet, so I was happy to take the other side of it, and I did.  Of course the options I sold expired worthless, I pocketed the premium, and I live to fight another day.

This is the third week in a row I have employed the same strategy: sell out of the money call options on Wednesday, wait for them to expire, then do it again.

Of course when the market inevitably crashes this strategy will lose a lot of money, but a $4 premium on a $504 stock is 8 tenths of 1 percent in 3 days, so it’s not nothing.  Of course, in hindsight I should have sold the $500 calls, for a much greater premium.

Or, I should have used a more advanced strategy (buying and selling different strike prices), but for me this is not investing, it’s just gambling, just for fun.  I have no intention of being a long term investor in Apple, and I suspect that once it hits around $130 post split I’ll be gone.

A much better speculation is the gold stocks, and on the consolidation we are experiencing now there should be some good buys, so I will attempt to focus on that next week.