Apple 2.0

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Betting against Apple options: The Poorman's Algorithm

November 9, 2013: 10:57 AM ET

As a rule, Apple tend to rise in the beginning of the week and fall at the end.

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FORTUNE -- Travis Lewis, an independent investor who studies the Apple (AAPL) options market, has long maintained that trading in puts and calls has become the tail that wags the underlying securities' dog -- especially for Apple options, the most heavily traded derivatives by volume, and especially since trading in those options went weekly in the summer of 2010.

To test his theory, Lewis began buying and selling Apple shares using what he calls the Poorman's Algo (for "algorithm") and tracking the results.

He explained it in a June 2012 Seeking Alpha post:

"Since Apple always trades more calls than puts, the stock will have to rise as buying bias comes in. Remember... when you buy a call, the seller will buy stock to offset it. This is what brings in the buying pressure. The opposite also has to take place later in the week as you will eventually sell this call. When you sell your call, the buyer of it will sell shares of Apple... In conclusion; people buy weekly calls in the beginning of the week and sell them at the end of the week.

If this is a tradable pattern, you should be able to make money by doing the opposite: i.e., buying the stock at the close of trading Friday and selling it at Tuesday's close, and that's what he did.

Did it work?

According to Lewis, his Poorman's Algo (so-called because you don't need a PhD. to set it up) has paid off nicely for each of the last three years.

See the attached chart for the results of fiscal 2013.

See also: Apple: Even Poormen Achieve Alpha.

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About This Author
Philip Elmer-Dewitt
Philip Elmer-DeWitt
Editor, Apple 2.0, Fortune

Philip Elmer-DeWitt has been following Apple since 1982, first for Time Magazine, and now on the Web for Fortune.com.

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