After hovering around the price all week, Apple closed at exactly $500 today. As in, five hundred dollars and zero cents. Is that a coincidence or what?
In all likelihood, the stock was pinned to $500 by options traders attempting to hedge their bets that Apple would rise or fall.
Options give you the right to buy or sell a stock at a certain amount, known as the strike price. For instance, an investor who holds a $500 call option for Apple expiring tomorrow—there are lots of these options—could buy the stock for $500 on the next trading day, Jan. 22. That investor would have wanted Apple to close above $500 today, so she could get the stock at a discount.
Put options work the opposite way, permitting the investor to sell the stock at the strike price. So anyone holding a $500 put option for Apple that expires tomorrow—there are lots of those, as well—would have wanted the stock to close below $500.
But options traders aren’t reckless, so when they buy call options, betting that the stock will rise, they usually also sell shares of the stock itself, in case it actually falls. And vice-versa for put options. That’s known as a hedge.
As a result, on a day when lots of Apple options are expiring at a strike price of $500, options investors were also likely buying and selling Apple stock around that level, as well. And, indeed, trading in Apple stock picked up in the final hour today until finally settling at precisely $500. That’s probably because so many options traders were on both sides of the bet that Apple would end up above or below $500. This is called strike pinning, and it’s increasingly common as trading in stock options grows more popular.
So who wins in this situation? Well, in a sense, no one, because the options for Apple at a $500 strike expiring tomorrow don’t represent a deal for anyone. But options traders undoubtedly made and lost money along the way by exchanging Apple options as the price of those options fluctuated. And now they own lots of actual Apple stock, both from exercising their options to buy it at $500 (and other prices) and from their hedging before the options expired.
So if Apple, which reports its first-quarter earnings on Wednesday, is about to start rising, as some argue, plenty of institutional shareholders stand to make quite a bit. Pinning the stock down, in that sense, is a short-term sacrifice for a potentially huge gain to come.