Apple Inc. (NASDAQ:AAPL) shareholders have been absolutely gorging themselves with profits. Their appetites are insatiable, and AAPL stock has been all too happy to deliver a daily dose of additional gains.
It’s like Groundhog Day.
Since the blowout earnings release in mid-January, shares of the tech titan have climbed 21%. At this rate, AAPL stock will reach $1,000 by next Tuesday.
Hyperbole? Indeed.
But honestly, at this pace the maker of all I-things will have tripled over the next 11 months. Surely, Apple’s campaign of gravity defiance will have concluded by then. Despite boasting the ascension pattern of a rocket ship, its acceleration is simply unsustainable.
Yes, even the mightiest of stocks on the Street have to pay the gravity piper from time to time.
Brave bears are beginning to take notice of the lofty levels in AAPL stock, wondering if the time for a short play is at hand.
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Fading AAPL with Options
While the most direct way to bet AAPL will decline is to short shares, it’s certainly not the cheapest nor the least risky. When shorting a stock, the potential risk is unlimited and the margin for error is slim.
By using some type of option spread, we can create a much wider profit zone for a pittance of the cost. Such an approach increases our margin for error while decreasing the potential risk.
Sell the Mar $135/$140 call spread for $1.25 or better. The reward is limited to the initial $1.25 credit and will be captured if AAPL stock sits below $135 by expiration.
The risk is limited to the distance between strikes minus the net credit, or $3.75, and will be lost if AAPL rises above $140. The call vertical spread boasts an expiration breakeven of $136.25, so as long as AAPL stock falls, stagnates or fails to rise more than 3% from current levels, the trade will deliver a profit.
While the trade lacks the unlimited reward potential of a short position, it still packs the potential to deliver a 33% return with a high probability of success.
As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.
