After briefly flirting with an upside breakout following earnings on Oct. 27, Apple (AAPL) is seemingly mired in a trading range, bounded by $120 to the upside and $115 to the downside, with $107 being major support.
The 200-day moving average of $121.82 lends further upside resistance, while the 50-day moving average of $115.23 provides additional support to the downside.
With the AAPL stock price currently hovering just below $119, where does it go from here?
Implied volatility (IV) is at the lowest level since late July, with AAPL December $119 calls trading at 19.88% IV and AAPL December $115 puts trading at a 21.69% IV. The current level of December implied volatility is roughly 22% cheaper than it was at the same time last year, even though the VIX is 12.87% higher than it was a year ago.
AAPL stock is also narrowing compared to the S&P 500, as seen below. The series of lower highs and higher lows will eventually be resolved with a breakout in one direction, especially given that the all-important Holiday shopping season is now in full swing.
Apple’s trailing-12 month price-to-earnings ratio is 12.83 — a significant discount to the S&P 500 multiple of 19. AAPL stock has a dividend yield of 1.77%, which is comparable to the S&P 500 yield of 1.99%.
How to Trade AAPL Stock
So with AAPL stock continuing to have a narrowing trading range and with option prices at extremely low levels, playing a breakout has become very attractive on both a risk/reward basis and from a probabilistic standpoint.
Having the 200-day moving average of $121.82 just above the $120 resistance level would add fuel to the rally if that level is breached, while a break below the 50 day moving average of $115.23, positioned right at $115 support, would create a similar downside scenario.
To play the upside breakout, I would look to go long the AAPL December $120 calls at $1.42 (19.88% IV). With AAPL stock closing at $118.30 on Monday, these calls are only 1.44% out-of-the money and need only a 2.44% move in AAPL stock over the next 17 days to break even.
For a downside breakout play, I would look to go long the AAPL December $115 puts at $1.00 (21.69% IV). These puts are 2.79% out-of-the money and need a 3.64% move in AAPL stock over the next 17 days to break even.
To reduce the initial cost further, shorter-term calls or puts could be sold against the long option positions, while still maintaining the initial bullish or bearish breakout stance.
But for traders looking to play for a breakout in AAPL stock heading into the Holiday shopping season, the cost/benefit has certainly become much more favorable as option prices have become much cheaper.
As of this writing, Tim Biggam did not hold a position in any of the aforementioned securities. Anyone interested in finding out more about option-based strategies or for a free trial of the Delta Desk Research Report can email Tim at tbiggam@deltaderivatives.com.