On Friday, Jan. 18, Apple Inc. (NASDAQ:AAPL) shares hit $500. For many, this perfect figure (not $499.99 or $500.01) raised eyebrows among bloggers and Twitter.
For others, concerns abounded after reports had recently been leaked citing weak iPhone 5 demand. During the session, Apple Inc. (NASDAQ:AAPL) shares fell to February 2012 levels and its $500 trading price, this represents a 28.8 percent fall from the company’s September high.
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Adding to the conspiracy theorists is the fact that Jan. 18 represented an options expiration date; this meant many puts and calls were due.
According to Barry Ritholtz of The Big Picture, shooting down a $500 conspiracy, explained that as options themselves can be traded, their values are correlated to their underlying stock’s price. When an expiration date nears, a stock can be attracted to a nice, round strike price.
This is called options pinning and it is a hedging behavior rather than illegal collusion, reported Bloomberg.
On Jan. 18., the lucky winner for Apple Inc. (NASDAQ:AAPL) was the round $500 share price.
Benjamin Golez, an assistant professor of finance at Notre Dame, concurred and wrote to Bloomberg in an e-mail, “On option expiration days the nearest strike price works like a magnet for the price of the underlying asset. Since strike prices are round numbers (typically $5 or $10 apart), and equity options expire on the third Friday each month, pinning can thus help us understand why stocks on the third Friday of each month have a tendency to close near round numbers.”
Perhaps this “conspiracy” came at an interesting time. There’s Apple’s upcoming fourth-quarter earnings report on Wednesday. In addition to potential questions about Friday’s $500 price, look for ones about the company’s gross margin guidance.
Recently, Apple’s stock have released numerous weaker-than-expected estimates, including lower than expected gross margin guidance for the December quarter. Many analysts will likely focus on this number in Wednesday’s report and it can be found in the company’s press release from a calculation in the income statement.
According to Chuck Jones, a Forbes contributor, a figure that analysts will keep an eye on is management’s March quarter gross margin guidance. That number will be disclosed in the company’s conference call from Peter Oppenheimer, Apple’s CFO, who will review the guidance numbers that Apple Inc. (NASDAQ:AAPL) provides to the group.
Jones’ sentiment regarding Apple has turned negatively in the last few months (with a large amount justified by lower EPS) but he believes the price drop is overdone. With the December quarter’s gross margin hitting 38.5% or higher (2.5% above guidance of 36%; he estimates 38.8%) and March quarter guidance for revenue and margins are within analysts estimates, EPS estimates could begin moving up.
Add in reasonable valuations (10x on this year’s earnings of about $50 and $100 in excess cash per share by 2013’s end), Jones thinks the stock will rally and has a $700 target price on the stock.
On Tuesday, shares were trading at $503.94, up 0.79 percent.