Tuesday, July 12, 2011

Who "Knifed" Apple? - Market Manipulation

I recently read an Article on CNN entitled "Who Knifed AAPL?" AAPL is currently trading at $353.
Below is the summary, with some more explanation behind it:

Sell some out of the money calls - say the July $360 calls for $2 each. This Friday is expiration Friday, meaning the option expires in 3 days.
Now, if AAPL goes up to $365, the calls are in the money, and the seller of the $360 will lose $3 ($5 in the money, $2 profit from sale).

To avoid this loss, the seller of the calls will try to lower the price of the stock to his own gain. He will sell stock to increase the supply of shares (simple supply and demand economics). This increase in supply will lower the price of the stock.
Here is the graph from last expiration Friday (which the article is based on).
screen-shot-2011-06-16-at-3-08-24-pm.png (207×388)
Notice that volume increases very close to close. The article alleges this increase in volume is not legitimate trading, but traders looking to lower the price of the stock for their gain.
Then, on Monday, the traders would buy stock (if they sold short, or to re-establish a position).

Here is my parting shot: Apple's average volume is 14,828,000 shares. To increase the supply of shares drastically, you have to move a lot of shares -, at $330.
If someone really wanted to employ this strategy - they'd be doing it with a $5 stock with few shares. Exchanges have surveillance's in place, if traders were to attempt this strategy, a red flag would come up.

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