Shares of Apple Inc. (NASDAQ:AAPL) have rebounded sharply off the post earnings drop, gaining nearly 15% off the Feb. 9 intra-day low of $150.24. Certainly much of the move can be attributed to the overall market rebound. Lackluster fundamentals and tired technicals, however, will likely staunch any further upside in AAPL stock.
The latest earnings report on Feb. 1 was tepid at best. While earnings-per-share of $3.89 did barely edge out analyst estimates of $3.86, it was by far the smallest beat over the past four quarters. The all-important iPhone sales came in much lower than expected at 77.3 million compared to expectations of 80 million. Most importantly, revenue guidance for Q2 2018 was lowered to $61 billion mid-range versus previous consensus of $65.73 billion. Expected margins were also taken down a notch. Yet AAPL stock is now trading higher than it was before the fairly dismal earnings news.
AAPL stock is also no longer a deep value stock, fast approaching a price-to-earnings multiple of 18, which has been a ceiling over the past five years. Now that interest rates are rising, P/E multiples will most likely begin to contract further. Factor in that the dividend yield on Apple is now back below 2% and the case for owning a slow growth Apple stock becomes less compelling.
AAPL stock is also getting overbought on a five-day RSI basis. Previous instances when Apple was this overbought proved to be significant short-term tops in the stock. The $175-level also looks to be major overhead resistance in AAPL with shares having trouble holding onto gains once that level had been pierced. The past two days solidified that notion as Apple tried and failed to break out to the upside on both occasions.
Although implied volatility (IV) in Apple option has certainly tempered following the recent run up, it is still above average in the 52nd percentile. This makes option selling strategies still very viable. So to position for a stall out in the Apple stock rally, using an out of the money bear call spread makes sense.
Apple Stock: Trade Idea
Buy AAPL Mar $182.50 calls and sell AAPL Mar $180 calls for a 45 cents net credit
The maximum gain on the trade is $45-per-spread with maximum risk of $205-per-spread. Return on risk is 21.95%. The short $180 strike price provides a 4.74% upside cushion to the $171.85 closing price of AAPL stock and it is also above the all-time closing high of $179.26.
As of this writing, Tim Biggam did not hold a position in any of the aforementioned securities. Anyone interested in finding out more about option-based strategies or for a free trial of the Delta Desk Research Report can email Tim at email@example.com.
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