Shares of Apple (NASDAQ:AAPL) were one of the biggest victims of the Chinese Tariff turmoil yesterday. AAPL fell over 3 points on news of the potential for heightened trade wars between the U.S. and China.
Considering that many of the suppliers to Apple are Chinese based, some of this fear is likely justified. If the recent tariff history is any guide, however, the bluster out of the Trump administration rarely matches the ultimate reality. I think the recent selling in AAPL stock is overdone. Apple is going to find its footing near current levels as it quickly approaches oversold conditions.
Nine-day RSI is nearing 30 — a level that has signaled significant lows in the past. What’s more, Apple’s moving average convergence divergence (MACD) just breached -1.00, which has also coincided with bottoms in prior circumstances.
Apple bounced off major support at $183.50 and closed more than 2 points off the lows of the day. This type of a reversal following such a dramatic drop is many times a sign that the sellers have finally become exhausted.
Apple is the largest market cap stock in the S&P 500 and therefore is normally highly correlated. Lately, however, that correlation has broken down.
While the overall market has dropped less than 1% from the recent highs, AAPL stock has lost over 4% from the recent high. I look for Apple to be a relative outperformer over the coming weeks and for the correlation to revert to the mean.
In my previous post on AAPL stock from June 5, I had a somewhat bearish viewpoint on Apple with the stock at $192 and recommended selling bear call spreads. Now that shares have fallen sharply, my viewpoint has changed as well-because price does matter.
Implied volatility (IV) in AAPL options rose due to the recent carnage. IV now stands near the highest level post-earnings, which favors option-selling strategies when structuring trades. So to position for support to hold in Apple, a bullish put credit spread makes probabilistic sense.
Apple Stock Options
Buy AAPL July $177.50 puts and sell AAPL July $180 puts for a 40 cents net credit
Maximum gain on the trade is $40 per spread with a maximum risk of $210 per spread. Return on risk is 19%. The short $180 strike is struck well below the $183.50 support level and provides a 3.06% downside cushion to the $185.69 closing price of AAPL stock.
Tim may hold some of the aforementioned securities in one or more of his newsletters. Anyone interested in finding out more about Tim and his option-based strategies can go to https://marketfy.com/item/options-and-volatility.
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