With Apple set to report earnings next week, the options market appears to be bracing for a big potential move to the downside.
Wednesday, put options that will only yield gains to their buyers if Apple shares fall below $101 by the end of next week are trading as if there is a 10 percent chance of such an outcome. A move to $101 would mark a drop of more than 11 percent for the tech giant.
Meanwhile, call options that can be used to speculate on a similarly sized rise for Apple are trading like there's only a 4 percent chance for such a move.
"Apple calls are cheaper than they've ever been because the demand's not there," since so many large investors now own the stock outright, commented Dennis Davitt of Harvest Volatility Advisors.
Apple puts may indeed look expensive, but "If people are buying them, that means there's a concern that they could whiff and the stock goes down 10 percent," said Davitt. "If money is going in, that's what dictates the price. That's why options are a great tell of what people are really thinking."
The probability calculations come from an option metric known as "delta" — a Greek symbol used to denote "change" — which measures how much an option's value responds to changes in the underlying stock. The 101-strike put on Apple expiring on Oct. 30 is currently trading with a delta of minus 10, meaning that for every dollar that Apple shares rise, the put's value will tend to decrease by a dime. Such action would make sense only if there is a 10 percent chance of the option ending up paying off, which is why delta is commonly used as a simple way of looking at probabilities of different stock moves.
Since options are more commonly used to hedge than to speculate, and more investors are long than are short, it makes sense that bearish options would be more popular and thus pricing in a larger move to the downside than to the upside. Still, the potential for a drop of more than 10 percent for Apple is striking. If shares do slide by that amount, it will wipe out more than $60 billion worth of market capitalization.
For Pacific Crest analyst Andy Hargreaves, the stock's next move will come down to iPhone sales.
"The next big driver is when they report [earnings] next week and we see what iPhone units are doing and what we're expecting them to do in December. Beyond that, it's going to be looking into the next iPhone cycle," Hargreaves said Tuesday on CNBC's "Trading Nation."
Although Hargreaves has a hold rating on Apple, he said he is becoming more positive on the stock, and sees it at a "really attractive" valuation.
Apple is scheduled to report earnings after the bell on Tuesday. Analysts are expecting earnings per share to increase to $1.87 from $1.42 a year ago, and revenue to grow to $51 billion compared with $42 billion a year ago, according to FactSet.