Apple options have led single stocks for several years now, with recent average daily volume near one million contracts and 9.5million contracts of open interest – a full 7.4% of single-stock total OI. On many days nearly 10% of all the single stock flow is in AAPL- leaving the other 3693 listings in the dust!
Apple call volume today is well into record territory with 3.6 million contracts trading by mid-afternoon (Editors Note: Preliminary AAPL option volume today showed over 5 million contracts traded). The prior record was 2.64million contracts, set in August when shares were near $95.00. While the recent all-time high in AAPL plays a part in today’s surge, the primary driver of volume is the ‘dividend play’ strategy that has been a controversial topic among option professionals for years. With AAPL shares climbing 12.5% in the past few weeks, the majority of the 5.4M calls currently outstanding are currently in the money. Of these, nearly 1.5M contracts are deep enough to qualify for early exercise (based on dividend(s) exceeding time value). If call holders exercise everything, the proceeds are near $40million.
In this strategy a relatively small number of professionals join forces to effectively ‘harvest’ the dividend amount left by long call holders who do not exercise by buying massive blocks of calls and exercising them immediately. Each trader buys and sells the same quantity of any given contract, but is careful to mark each buy ‘opening’ so they can exercise the longs at the end of the day. Currently OCC clears option purchases first, then assignments, followed by option sales, which leaves the loophole for assignment of newly purchased calls despite the offsetting short. The play effectively inflates the pool of exercised calls to nearly 100% of total open interest, which is what most of the pre-existing shorts will find themselves assigned. The pros will also be assigned on nearly 100% of their short, but their massive position size works out to a significant quantity of unexercised short calls, which result in profits when their value declines by the dividend amount.
Typically, not every long call holder exercises when they should for reasons that include ignorance of the dividend, insufficient capital and intentional non-exercise to avoid regulatory reporting thresholds. Historical data shows that about 30% of AAPL calls are not exercised each quarter, which works out to significant dollars for traders able to implement the dividend play.
Today, with the highest level of eligible call open interest (not split adjusted) on record, we see that nearly $12M may be up for grabs to dividend traders, and call volume has spiked accordingly. However, today is likely to mark the death of the AAPL dividend Golden Goose for some traders, as the SEC recently approved clearing changes that will close the loophole by clearing buys and sells before assignments. This change is expected to take effect later this month and is likely to benefit smaller traders, who may begin to see less than 100% assignment ratios on their short positions in the future.
Writer has no holdings in AAPL. A version of this story was previously published by TheStreet.com at http://www.thestreet.com/options-profits