AVSPY: Using NASDAQ OMX Alpha Index Options to Trade Apple and the Market

Apple ( AAPL) traded down 0.56% on Tuesday, a day when the market staged a sharp last-hour rally to close up 2%. The story was that investors were somehow disappointed that Apple did not announce the "iPhone 5," whatever that means. As technology writer Macro Arment noted, one has to wonder how much of the reaction has to do with the the numeral rather than the actual product. Some commentators recalled the initial very negative reaction to the iPad, which went on to great success.

Whatever the cause of the lag in Apple shares, NASDAQ OMX Alpha AAPL vs. SPY Index (AVSPY) was down 2.5% on the day as a result. We have traded options on this index profitably before, but for those who are unfamiliar, AVSPY tracks the daily total return of AAPL versus SPDR S&P 500 ETF (SPY). Essentially, a long position in the index would be a bet that Apple will outperform the broad market.

An interesting trade was filled in this product on Tuesday. Typically, customers trade AVSPY options in lots of 5 or 10 contracts, but one trader sold the March 155 puts naked 3,000 times at a price of $7.90, about a half hour before the market close. That's a very bullish bet that Apple will continue to outperform over the next six months - if the trader is correct, the value of the premium collected is $2.37M.

I don't care to commit to a position that far out in time, but I do share the same general view. Who doesn't? SPY is still 13% exposed to the financial sector, the anchor around the neck of the U.S. economy. For AAPL to underperform the broad market over time would require a serious misstep from Cupertino.

Because premiums in the options are about as high as they've ever been, a call purchase is not a great idea. Traders who share the thesis of the trade could establish a synthetic long position -- effectively "owning" AVSPY even though the underlying is not tradeable -- by buying an at-the-money call and selling an at-the-money put. I want to be positioned with less risk, so let's sell a vertical put spread on the view that AAPL will continue to be a relative market leader, even if the market as a whole doesn't go anywhere. One thing I like about these relative value plays is that they don't require a directional opinion about stocks in general, i.e. this trade is still viable if you are generally bearish about the market.

Trades: Buy to open AVSPY November 150 puts for $1.95 and sell to open AVSPY November 155 puts at $2.75.

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At the time of publication, Jared Woodard held no positions in the stocks or issues mentioned.

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