How to Trade the Apple Death Cross (AAPL)

Advertisement

Apple Inc. (AAPL) is following in the footsteps of the Dow Jones Industrial Average with a death cross of its own today.

And since the Dow Jones’ death cross precipitated the recent stock market crash, anxious traders everywhere are eyeing Apple stock with fear and trepidation.

Is the king of Wall Street destined to suffer a similar fate? I suspect not. Despite its ominous-sounding moniker, the death cross signal has little predictive value in my experience. Like a number of technical analysis signals used in isolation, its forecasting record is spotty.

Before we travel too far down the rabbit hole, however, a brief review is in order.

Apple Death Cross

The death cross is created when the 50-day moving average crosses below the 200-day moving average. Chartists use moving averages to help clarify trend direction. Because these indicators track the average price of a stock over time, they smooth out the often erratic day-to-day gyrations, thus providing a cleaner view of the price trend.

Since the 50-day MA has fewer data points than the 200-day MA, it’s more responsive to recent price action. The ongoing AAPL stock decline has been dragging the 50-day MA lower and lower until finally today it sunk below the 200-day MA, causing the formation of the (cue spooky music) death cross.

Apple AAPL stock death cross
Click to Enlarge
Source: OptionsAnalytix

Unfortunately, the Apple death cross tells us much about the past, but little about the future. With Apple stock already having entered a full-fledged bear market by falling 20% from its highs, damage aplenty has already been inflicted.

But, hey, if you think the current bear market goes the distance and AAPL plumbs new depths in the coming months, a number of option strategies await with promising rewards should the Apple death cross prove prescient this go-around.

The Apple Death Cross Trade

Elevated market volatility is causing option premiums to swell — especially in Apple stock options. In fact, the CBOE AAPL VIX recently soared to its highest level ever. So, if you’re looking to load up on AAPL puts, I suggest buying a put spread instead to contain the cost.

Buy the AAPL Oct $105/$95 put spread for $3. The spread consists of buying the Oct $105 put while simultaneously selling the Oct $95 put. The max risk is limited to the initial debit of $3 and will be lost if AAPL sits above $105 at October expiration.

The max reward is limited to the distance between strikes minus the net debit, or $7, and will be captured if AAPL sits below $95 at expiration. By risking $3 to capture $7, the spread offers an impressive 233% return on investment.

As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.

More From InvestorPlace

For a free trial to the best trading community on the planet and Tyler’s current home, click here!


Article printed from InvestorPlace Media, https://investorplace.com/2015/08/aapl-stock-trading-the-apple-death-cross/.

©2024 InvestorPlace Media, LLC