Why You Shouldn’t Count Apple Inc. Stock Out for Much Longer
Shares of Apple Inc. (NASDAQ:AAPL) fell sharply along with the overall market yesterday. The Warren Buffett favorite was pretty much the last man standing, but ultimately the intense selling pressure took down even Apple stock. While there may certainly be some more downside on the horizon, I expect AAPL to begin to find some support at lower levels.
In my previous post on Apple stock from Feb. 21, I postulated that a rally in AAPL was about to end, which proved to be accurate. Some of that thesis was predicated on the fact that AAPL had become overbought from a technical perspective. In addition, implied volatility (IV) had dropped to recent lows, also usually a harbinger that complacency had reached an extreme and that a pullback was likely in the offing.
Both of those conditions have been rectified in a big way, given the recent drubbing in Apple stock. The nine day RSI is now well off the previous overbought reading and implied volatility has spiked noticeably on the sell off. Add in the 3% pullback from the all time highs at the $180 area and Apple stock is looking a little more attractive at current levels. There is also major downside support lurking at the $167.50-level. I look for AAPL to consolidate and once again, trade sideways between $167.50 and $175 over the coming weeks.
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One of the advantages of using option strategies is the ability to customize your trades to fit your viewpoint. My more bearish outlook on AAPL from a few days ago recommended a bearish call spread at the $180 strike. Now that shares have dropped appreciably, my bearish views have tempered-because price does matter.
While not looking for a rip-roaring counter trend rally, I do expect Apple stock to hold at the $167.50 area. So to position to be a buyer of AAPL on further weakness (and to hedge my bear call spread position), an out of the money put credit spread makes intuitive sense.
Apple Stock: Trade Idea
Buy the AAPL Mar $165 puts and sell the AAPL Mar $167.50 puts 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 $167.50 strike price provides a 4.28% downside cushion to the $175 closing price of AAPL stock and it is structured right at the major support level.
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 timbiggam@gmail.com.
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