Get Defensive With Apple Options

by Tyler Craig | August 6, 2013 11:25 am

Like a phoenix rising from the ashes, Apple’s (AAPL[1]) ongoing ascension represents a rebirth of sorts. Perhaps the stock has finally completed its transformation from representing a performance enhanced, market share-stealing innovator to a slower-growing cash cow with a respectable dividend to boot.

At the max pain point of Apple’s recent fall from its lofty $700-plus perch, the yield on its quarterly dividend had risen to 3.16%. In light of its recent rebound the divvy yield has dropped to 2.6% — and that’s despite an increase from $2.65 to $3.05 as of the May payout — but you won’t see shareholders complaining. Who wouldn’t take an 18% haircut in the dividend yield in exchange for a 21% rise in the stock price? The recent two-month $82 climb in Apple’s share price represents almost seven years’ worth of dividend payments!

The tech sector is certainly glad to have its once fearless leader back in the driver’s seat. Given AAPL’s 13% weighting in the Nasdaq-100, the tech-heavy index relies heavily on Apple’s performance. With the help of Apple’s recent resurrection the ETF that tracks the Nasdaq-100, the Powershares QQQ Trust (QQQ[2]) has seen its relative strength vs. the S&P 500 Index rise to a new seven-month high (blue circle).

QQQchart Get Defensive With Apple Options
Click to Enlarge

For the majority of the year, Apple has been sandwiched between resistance at $470 and support at $390. Thus far any and all attempts to break free from its range-bound prison have been thwarted. The easy part of its recent rebound might well be over.

With AAPL having traversed the entire range over the past two months, now comes the true test. Not only must Apple break above the $470 resistance zone, but the declining 200-day MA has finally caught up, adding further firepower to the potential amount of supply sitting atop the stock.

AAPLchart Get Defensive With Apple Options
Click to Enlarge

Now is a logical time to consider taking partial profits, tightening stops and striking an otherwise defensive posture just in case Apple fails once again to deliver a successful breakout — particularly for those who were savvy enough to snatch-up shares in the low $400s. Traders owning at least 100 shares of AAPL could consider harnessing the hedging power of options contracts to attain some downside protection.

Buying a put option is a simple way to safeguard your recently accumulated profits. In exchange for paying a bit of premium, you acquire the right to sell your shares at a set price anytime before the expiration date.

For example, you could buy the Oct 460 put for around $18, thereby locking in the right to sell your shares at $460 for the next three months.

If the overhead resistance levels prove too much for AAPL — inciting yet another dive to the lower end of its range — the put will increase in value, helping to offset the loss in the stock. On the other hand, if AAPL is able to continue its rally, you might end up taking a loss on the put option. However, net-net you will still be racking up additional profits, as the gain in your stock position will be larger than the loss on the put.

As of this writing, Tyler Craig was long AAPL.

Endnotes:
  1. AAPL: http://markets.financialcontent.com/investplace/quote?Symbol=AAPL
  2. QQQ: http://markets.financialcontent.com/investplace/quote?Symbol=QQQ

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