Bite Into AAPL Profits with this Credit Spread

by John Kmiecik | October 31, 2013 9:24 am

Bite Into AAPL Profits with this Credit Spread

According to many recent economic reports, the economy has not recovered as much as analysts had anticipated. But some companies seem to be doing better than others, based on sales.

Here is a trade idea on one of the most popular stocks out there, Apple (AAPL[1]), to illustrate the beauty and benefit of options.

Apple (AAPL — 524.90): Put Credit Spread

The trade: Sell the Nov. 29 475/480 Put Credit Spread (selling the Nov. 29 480 put and buying the Nov. 29 475 put) for 45 cents or better.

The strategy: The maximum potential profit for this trade is 45 cents if AAPL is trading above $480 at Nov-29-13 expiration. The maximum loss is $4.55 (5 – .45) if AAPL is trading below $475 at Nov. 29 expiration. Breakeven is $479.55 at expiration based on a credit of 45 cents.

The rationale: The technology giant just released its long-anticipated quarterly earnings. The company sold nine million units of its new iPhones and beat its own consensus estimates on revenues and gross margins. The sticking point for some was that the company posted lower gross margins and net income this quarter as compared to the previous year. Because of this, the stock’s value may have suffered after earnings. The stock ran up to almost $540 before settling below $517 the day after earnings were announced.

AAPLchart Bite Into AAPL Profits with this Credit Spread[2]

The stock has several areas of potential support that keep this stock from moving lower, which will benefit this trade. There are previous pivot levels (significant price levels that have acted as support and resistance in the past) at $520, $500 and $480 which are all above the sold strike. When approached, areas of support can reverse the stock higher again.

What also makes this trade idea intriguing is the different scenarios in which this trade idea can profit. If AAPL moves higher or trades sideways, the put options will eventually expire worthless. Even if the stock does fall, it could drop more than $40 by the Nov. 29 expiration, and the puts would still expire worthless — the premium is yours to keep. AAPL may not be on your bullish watch list, but as long as the stock doesn’t take a dive any time soon, this trade idea will put a smile on your face.

As of this writing, John Kmiecik did not hold a position in any of the aforementioned securities. Get a free trial of John’s live options trading room here[3].

Endnotes:
  1. AAPL: http://studio-5.financialcontent.com/investplace/quote?Symbol=AAPL
  2. [Image]: http://investorplace.com/wp-content/uploads/2013/10/AAPLchart.png
  3. free trial of John’s live options trading room here: http://markettaker.com/options_insider_trial/

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