Studying the collective buying activity of hedge funds is important, as our research has shown that funds’ top 30 picks outperformed the market by an average of 2 percentage points annually, between 1999 and 2009. When the data is limited to their top 15 small cap picks, the results are even more striking, with annual returns that outperformed the market by double-digits.
However there are other important indicators to consider from collective fund activity, and one of those is the amount of put options funds have out on a particular stock. A put option could represent a number of scenarios. Firstly, it could simply be a hedge against a large long position the fund has in the same company, so that if things go drastically wrong and shares tank, the fund could recoup some of its losses through the put options. In other cases, the put option may not be a hedge, but rather an out-and-out indicator of bearish sentiment, with the expectation that the stock will decrease and the owner of the put options will be able to profit through buying shares at the reduced price and selling them at the strike price.
In this article, we’ll take a look at the five stocks that had the greatest number of put options on them at the end of the year, and try to determine why that is, with a verdict as to whether the majority of them are likely hedges, or bearish sentimentality.
5. Apple Inc. (NASDAQ:AAPL) checks in at fifth with 15 hedge funds having put options on the most valuable company in the world, down from 20 at the end of the previous quarter. The volume isn’t surprising, given Apple is the most-owned stock among the hedge funds we track, with 149 funds having long positions in it. This makes it more likely at least a few of them will hedge their bets on Apple with put options, no matter how optimistic they are. One example is D E Shaw, which has both put and call options on Apple, as well as a long position of 5.28 million shares. Ken Griffin likewise has put and call options, and a long position. Several other funds with long positions in Apple also have put options, while only a handful have put options without any long position, including Alphabet Management, which increased its put options by 111% to 305,100, which are valued at $1.23 million if they can be exercised. Apple is up 16.7% year-to-date, likely rendering those put options null and void.
Verdict: Hedges
4. Netflix, Inc. (NASDAQ:NFLX) lands in fourth, with 16 hedge funds owning put options on the digital streaming company, which was down 7% in 2014 after a monumental 2013 in which it gained over 300%. That was an increase from just 12 put options at the start of the fourth quarter, a quarter in which Netflix dipped 24% on weakness in subscriber growth and margins, as reported in October. Put options were high given the fact that fund ownership also drastically decreased during the fourth quarter, from 57 funds at the start to just 44 by the end. Pomelo Capital and Maplelane Capital were two funds with large put options on Netflix, consisting of 313,000 and 254,500 respectively, while each did not have a long position in the company. Ken Griffin’s Citadel Advisors also had a large number of put options, with only a small long position in the company.
Verdict: Bearish
3. Intel Corporation (NASDAQ:INTC) is third, with 19 hedge funds possessing put options on the chip maker at the end of 2014. Intel has struggled to make inroads into the mobile industry, though it’s hoping its new line of low-cost, low-power Atom mobile processors will be the on-ramp onto that road. Funds are growing more skeptical of the company’s stock after it’s strong 2014, when it gained over 40%, with fund ownership decreasing to 62 from 68 during the fourth quarter, and put options increasing to 19 from 15. Brian Higgins of King Street Capital was bearish on Intel, opening a new position with 2.0 million put options on Intel in the fourth quarter, making it his third most valuable holding, if cashed in. One of our newly tracked funds, Darsana Capital, managed by Anand Desai, also had a large collection of put options, while holding no long position.
Verdict: Bearish
2. Amazon.com, Inc. (NASDAQ:AMZN) lands in second, also with 19 funds holding put options on the e-commerce giant, which endured a 25% drop during 2014. That was an increase from 16 funds holding put options at the start of the quarter. However overall fund activity was bullish, with fund ownership increasing to 76 from 66, and invested capital increasing from $4.49 billion to $5.91 billion, despite a decrease of 3.58% in shares during the quarter. The largest put options were held by Citadel Advisors and D E Shaw with 1.39 million and 763,700 respectively. Each fund held large long positions in Amazon. Arbiter Partners Capital Management on the other hand had a large number of put options, 531,000 total, without a long position. It increased its put options on Amazon by 604% during the quarter.
Verdict: Mixed
1. Tesla Motors Inc (NASDAQ:TSLA) is at the top of the list (or is that the bottom?) with 22 hedge funds holding put options on the electric vehicle automaker, whose Model S was recently crowned the best car by Consumer Reports for the second straight year. That was a slight increase from the 21 put options held by funds at the end of the third quarter. Long positions in Tesla meanwhile decreased to just 25 from 31, barely outpacing the positions with put options. Soroban Capital Partners held the largest collection of put options on Tesla, at 1.20 million, and held no long position. Arbiter Partners was also bearish on Tesla, owning 758,500 put options and no long position, while D E Shaw held a large collection of both put and call options, in addition to a small long position. While Tesla enjoyed a very strong year overall, up 47.17%, it stumbled 7.97% in the fourth quarter, and has continued to flounder in 2015, down 8.57%. Short interest on Tesla peaked at the start of the year, and is now beginning to decline again.
Verdict: Bearish
