At the epicenter of the recent stock drop lies Apple Inc. (AAPL). The king of all iDevices has now dropped 6% from its recent high. Compared to the Nasdaq Composite’s relatively mild 2% pullback, we’re talking about quite the relative weakness here.
So is this a early warning sign that the rest of the market is destined to drop?
Nope. For starters, the AAPL stock drop was sped along by company-specific news regarding weak iPhone So far, the rest of the market cares little about that news. Which brings us to our second point: The rest of the market remains quite healthy and bullish seasonality is still providing a tailwind.
Let’s dig into the AAPL chart and see if there’s a trade to be found.
AAPL Stock Chart
Though the price of AAPL stock has descended below the 20-day moving average, it remains above the more important 50-day moving average. Incidentally, the 50-day MA is rising, suggesting that the intermediate trend of AAPL still points higher.
Better yet, the ongoing pullback has yet to break any key support levels. While AAPL has given back a healthy chunk of gains, it has yet to see any significant technical deterioration.
Another development of particular interest to option traders is the uptick in implied volatility accompanying the stock swoon. AAPL implied volatility has lifted from 24% to 31%, expanding option premiums along the way. The recent AAPL stock price rise had deflated option premiums considerably, so the volatility ramp is a welcome change for option sellers.
To exploit the anticipated rebound in AAPL stock and the now elevated implied volatility, sell the AAPL Dec $105/$100 put spread for 50 cents or better.
Consider the trade a wager that AAPL stock price sits above $105 at expiration. The max reward is limited to the initial 50-cent credit. The max risk is limited to the distance between strikes minus the net credit, or $4.50, and will be lost if AAPL stock falls below $100 by expiration. You may have to wait for Apple to pull back a bit more to achieve that credit, but the 50-cent reward is worth your patience.
As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.
