Apple, Facebook options reflect hopes for stock gains

By Doris Frankel

REUTERS - The options market is reflecting a higher probability of large upside moves in Apple Inc and Facebook Inc stock when both companies report quarterly earnings next week.

Stock of Apple - the largest U.S. company by market value - is down 1 percent since January 1 while Facebook shares are up 95 percent.

Many investors appear to be speculating on a rally rather than a sell-off in both stocks and are turning to the options market, buying calls at strike prices that are far above the current share price - also known as "out-of-the-money." These are relatively more expensive than out-of-the-money puts.

The situation is unusual, because investors are typically more concerned about downside risk and are willing to buy "disaster puts" - far out-of-the-money puts - at a higher relative price. This is because they do not want to lose a lot of money if the stock gets hit, said Steve Place, a founder of options analytics firm investingwithoptions.com in Austin, Texas.

"When we think about risk in the stock market, it's normally about the downside," he said. "People are scared about the downside risk."

Call options are a contract that gives the right to buy a stock at a fixed price by a certain date, while a put gives investors the right to sell a stock at a preset price.

"Both (stocks) continue to have inverted skew, indicating options traders believe a sharp move higher is more likely than a sharp move lower," said Matt Franz, investment adviser representative at Stutland Volatility Group in Chicago.

SMILE

Normally, skew is an options metric that shows out-of-the-money calls being priced at lower levels of implied volatility than both at-the-money options and out-of-the-money puts. Implied volatility is a measure of perceived risk of future stock movement.

The options of both Apple and Facebook are currently reflecting what traders call a "smile," referring to a curve or skew on the implied volatility of strike prices when one looks at a chart.

"What we are seeing right now in these tech stocks is a 'U' shape or a smile with both out-of-the-money puts and calls priced at higher levels of implied volatility than at-the-money strikes," said Jared Woodard, a principal at options research firm Condor Options in Forest, Virginia.

In Facebook, the 10 percent out-of-the-money $57.50 strike calls expiring November 16 were priced at an implied volatility of 79 percent and cost $2.20 apiece as of Friday morning.

The 10 percent out-of-the-money November $47 strike puts on Facebook were priced at 77 percent implied volatility at $1.68 as of Friday morning, according to Woodard. Facebook shares closed down 0.9 percent at $51.95 on Friday.

In Apple, the 10 percent out-of-the-money November $585 strike calls were priced at about 38 percent implied volatility and cost $3.80 and the 10 percent out-of-the-money November $480 strike puts were priced at 36 percent implied volatility and are at $3.35 on Friday morning, Woodard said. Apple shares closed down 1.1 percent at $525.96 on the Nasdaq on Friday.

Not everyone agrees that Apple's options pricing reflects bigger upside risk for the shares. "While I see the option market reflecting more upside potential for Facebook, I see elevated upside and downside risk for Apple shares in the options skew," said Ophir Gottlieb, managing director of options analytics firm Livevol.

Apple is due to report quarterly results on Monday and Facebook will report on Wednesday.

Over the past two years, the inverted skew was seen about 13 percent of the time in Apple, said Henry Schwartz, president of options analytics firm Trade Alert. For Facebook, this inverted skew has occurred 11.8 percent of the time, since the company became public in May 2012, Schwartz added.

"Demand for upside calls has outpaced that for puts, driving an inversion in the stocks' skew, which is fairly atypical," said Mandy Xu, Credit Suisse equity derivatives strategist.

Jason Goepfert, president of SentimenTrader.com, says Apple is currently ranked 10th among 1,500 stocks he tracks in terms of optimistic sentiment. His data, which goes back about two years, is based on a combination of put-to-call ratios and open interest, short interest figures, analyst recommendations and recent price momentum.

(Reporting by Doris Frankel; editing by Matthew Lewis)

View the original article here

Asian stock markets fall, dollar near two-year low vs euro

By Dominic Lau and Vidya Ranganathan

TOKYO (Reuters) - A stronger yen depressed Japanese stocks on Friday, while the dollar was hemmed in near a two-year low against the euro by expectations the U.S. Federal Reserve will continue its monetary stimulus well into 2014.

Those expectations were tempered, however, by continued worries over tighter cash markets in China, leading to a lopsided and selective rally in Asian markets.

The Nikkei share average's 2 percent drop was also set to pressure European markets on Friday, financial bookmakers predicted.

Financial spreadbetters were forecasting falls in Germany and France as the region's equity indexes pause for breath after hitting fresh highs this week. They expected Britain's FTSE 100 to open almost unchanged but Germany's DAX was seen opening down by as much as 0.3 percent while France's CAC 40 was seen falling 0.4 percent.

In Asia, the Indonesian rupiah rallied nearly 2 percent against the weak dollar, but the Aussie was on the back foot. Aussie shares rose 0.3 percent, ending near the 5-year high of 5,402.4 hit earlier in the week.

Meanwhile, South Korean stock markets fell as investors braced for some profit-taking in a market that has seen record foreign buying for 40 consecutive sessions and has pushed the won to a two-year high this week.

The KOSPI index was down 0.8 percent even after Samsung Electronics Co Ltd, the index's largest component, said its quarterly operating profit surged 26 percent to a new record.

"A combination of foreign outflows and shadows of China liquidity concerns are dragging on the market," said Lee Kyung-soo, an analyst at Shinyoung Securities.

MSCI's broadest index of Asia-Pacific shares outside Japan eased 0.35 percent, reversing earlier slight gains. The index fell 0.1 percent on Thursday as rising Chinese money market rates countered signs of a pick-up in manufacturing.

Shanghai shares hit their lowest levels in a month, while Tokyo's stock market was set to suffer its first weekly drop in three weeks.

Although the Japanese quarterly earnings season is still at an early stage, 70 percent of the 10 Nikkei companies that have reported so far have missed market expectations, according to Thomson Reuters StarMine. That compared with 42 percent in the previous quarter.

U.S. S&P E-mini futures were flat in early trade. The S&P 500 index had advanced 0.3 percent on solid earnings and expectations that monetary stimulus will be in place for the foreseeable future after weak data.

U.S. manufacturing output fell for the first time in four years and the number of new claims for unemployment benefits fell less than expected last week.

DOLLAR WEAKNESS

The euro was up 0.1 percent $1.3815, not far from a two-year high of $1.3826 touched on Thursday and shrugging off data showing the pace of growth in euro zone business unexpectedly eased this month.

"The dollar will not rally without Fed tapering expectations rising again, but we would not chase EUR/USD higher here, as rate compression suggests the pair is unlikely to break much higher," Societe Generale analysts wrote in a note, saying they favoured Scandinavian and Antipodean currencies into year-end.

"Fed tapering expectations being pushed out into 2014 and further ECB easing early next year suggest a favourable policy environment for the FX carry trade. Throw in lower volatility and seasonality effects, and one has the perfect cocktail for the carry trade."

Yet the Antipodeans, the Aussie and New Zealand dollars, were nursing broad losses too as investors quit extended long positions in the two currencies.

The Aussie was settling around $0.9605, after touching a low of $0.9582. It had hit a 4-1/2-month peak of $0.9758 on Wednesday, but is on track for a loss of close to 1 percent for the week.

The kiwi was holding just above a 10-day low at $0.8310. It had also peaked during the week at a multi-month high, but now faces a weekly loss of more than 2 percent.

Against the yen, the dollar stood at 97.09, a shade off the two-week low of 97.15 yen hit on Wednesday.

The dollar index, which tracks a basket of major currencies, was little changed.

Gold paused for breath after climbing 1.1 percent on Thursday, while U.S. crude prices added 0.3 percent to about $97.35 a barrel, moving away from a 3-1/2 month low of $95.95 touched in the previous session.

(Additional reporting by Gyles Beckford in Wellington and Jungmin Jang in Seoul; Editing by Kim Coghill and Eric Meijer)

View the original article here