Apple Sees Strong Demand for Insurance in Case of Downturn

$Apple(AAPL)$   is seeing strong demand for put options that can serve as insurance against a potential share slump in case the company's profit takes a huge hit from rising memory prices. 

An active buyer paid a premium of almost $8 million for put options that give their holder the right to sell 800,000 Apple shares in the next 142 days. That strike price is more than $10 below the current stock price. 

Shares have fallen 6.7% this month as investors await word from Apple executives on the impact of rising memory prices on the production cost for iPhones and iMacs when the company reports its fiscal first quarter results on Friday. 

"We believe that positive data points in relation to robust iPhone 17 demand have been overshadowed by investor concerns in relation to gross margin impact from the unprecedented rise in memory costs," JPMorgan analysts including Samik Chatterjee wrote in a note Monday. 

Analysts, on average, expect Apple to post a 47.52% gross margin in the quarter ended December, up slightly from the 47.2% in the previous three months. For the full year ending in September, they see margin hovering around that level, higher than last year's 46.9%, signaling analysts weren't too concerned about rising memory prices crimping profit. 

Still, the JPMorgan analysts raised their price target on Apple shares to $315, from $305, as they expect “limited margin pressures from higher memory costs, as Apple has long-term supply and pricing related contracts with suppliers.” 

They also said the company's large scale puts Apple at an advantageous position in negotiating any new supply contracts.

Analysts, on average, expect the company to post an 11.4% growth in revenue to $138.4 billion in the first quarter, boosted by strong demand for iPhones. JPMorgan analysts expect sales of the company's biggest product to even come in ahead of consensus. 

Despite the optimism, some institutional investors are buying back the put options they sold in case the stock head lower. 

The second biggest Apple option trade was the purchase of $7.81 million in put options that give their holder the right to sell 651,000 shares at $260 in the next 52 days. 

Based on current implied volatility, that trade has a profit probability of less than 40% for the buyer. That put option has a maximum profit potential of $24,767.50 per contract and a maximum loss potential of $1,232.50. Each option covers 100 shares. 

The breakeven is $247.675, meaning Apple's share price would need to fall below that level for the buyer to make money from the trade. 

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