Studying the collective buying activity of hedge funds is important, as our research has shown that funds’ top 30 picks outperformed the market by an average of 2 percentage points annually, between 1999 and 2009. When the data is limited to their top 15 small cap picks, the results are even more striking, with annual returns that outperformed the market by double-digits.
However there are other important indicators to consider from collective fund activity, and one of those is the amount of put options funds have out on a particular stock. A put option could represent a number of scenarios. Firstly, it could simply be a hedge against a large long position the fund has in the same company, so that if things go drastically wrong and shares tank, the fund could recoup some of its losses through the put options. In other cases, the put option may not be a hedge, but rather an out-and-out indicator of bearish sentiment, with the expectation that the stock will decrease and the owner of the put options will be able to profit through buying shares at the reduced price and selling them at the strike price.
In this article, we’ll take a look at the five stocks that had the greatest number of put options on them at the end of the year, and try to determine why that is, with a verdict as to whether the majority of them are likely hedges, or bearish sentimentality.
5. Apple Inc. (NASDAQ:AAPL) checks in at fifth with 15 hedge funds having put options on the most valuable company in the world, down from 20 at the end of the previous quarter. The volume isn’t surprising, given Apple is the most-owned stock among the hedge funds we track, with 149 funds having long positions in it. This makes it more likely at least a few of them will hedge their bets on Apple with put options, no matter how optimistic they are. One example is D E Shaw, which has both put and call options on Apple, as well as a long position of 5.28 million shares. Ken Griffin likewise has put and call options, and a long position. Several other funds with long positions in Apple also have put options, while only a handful have put options without any long position, including Alphabet Management, which increased its put options by 111% to 305,100, which are valued at $1.23 million if they can be exercised. Apple is up 16.7% year-to-date, likely rendering those put options null and void.