Is The Options Market Betting Against Apple Inc. (AAPL)’s Recent Rally?

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At times, it’s useful to take a peek into the options market to see what options traders are pricing in — or not pricing in.

Ahead of Apple Inc. (NASDAQ:AAPL) earnings, the market was pricing in a $35 move in either direction, judging by the price of a near-term straddle. That volatility play would have proved profitable, since shares plunged an incredible $57 after the iPhone seller didn’t sell as many iPhones as investors were hoping for.

Over the past week, Apple Inc. (NASDAQ:AAPL) rallied amid talk that the company should increase its dividend. It can certainly afford to and investors are demanding that Apple return some of that cash since it has well more than what it needs for operations. As it turns out, the options market is not pricing in any type of dividend increase within the next year. Is it right to bet against Apple Inc. (NASDAQ:AAPL)’s recent rally?

Apple Inc. (NASDAQ:AAPL)Some numbers games
A synthetic stock position created with options typically involves going long a call while shorting a put, usually with the same strike price and expiration. A position of this kind will tend to replicate the performance of the underlying asset. The goal is to get the combined delta of the options as close to 1 as possible, which would mean that a $1 change in the underlying stock would translate into approximately a $1 change in the total combined value of the options.

Options traders at Susquehanna Investment Group have taken note of what the market is saying based on the current price of a synthetic long. Specifically, they are tracking the price of a synthetic long created out of a call and put that both have a $500 strike price and expire in January 2014.

A week ago, when Apple Inc. (NASDAQ:AAPL) closed at $453.62, this combo trade would have been worth $54.20 (buy the call for $26.73 and sell the put for $80.93). They estimate that this was pricing in an expectation of approximately $10.22 in dividends over the following year, which is pretty close to the $10.60 Apple currently pays annually. These amounts won’t line up directly because of a number of other pricing factors, including interest-rate assumptions.

Within the next week, Apple Inc. (NASDAQ:AAPL) went ex-dividend for the current quarter’s $2.65-per-share payment, which means that the amount of dividends that the options market is pricing in should decrease by approximately that same amount, bringing the implied total to roughly $7.57. Instead, the combo was worth $37.55 (buy the call for $35.40 and sell the put for $72.95), implying a dividend stream over the next three quarters of $8.13.

Put it all together
There are a large number of variables and assumptions to consider with all of these pricing factors, so these figures shouldn’t be construed as exact estimates. However, they do serve as a proxy for what types of expectations the options market is pricing in. The point is that the options market is pricing in a small probability that Apple will increase its dividend by a small amount over the next year or so.

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