Apple Inc. (AAPL) Stock: Kiss This Stealth Rally Goodbye

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Shares of Apple Inc. (NASDAQ:AAPL) made a new recent low of $90.34 on May 4 following a downbeat earnings report and news that Carl Icahn had exited his entire position in Apple stock. Since then, however, AAPL has been quietly sneaking higher, with the stock now up over 9% since then to close at $98.63 on Monday.

Unfortunately, the rally is likely to run into trouble at these levels, and AAPL stock likely will consolidate and pull back slightly over the coming weeks.

From a technical perspective, Apple had rallied to trade into the post-earnings gap between $98 and $104, as seen in the AAPL stock chart below. There is also some additional major overhead resistance at the $104 level as well.

AAPL stock chart 1
Click to Enlarge

Apple shares also have been performing stride for stride with the S&P 500 since the latest earnings report, as evidenced in the AAPL stock chart below.

With the S&P 500 now fast approaching all-time highs, any pullback in the overall market will likely lead to a similar pullback in AAPL shares.

AAPL stock chart 2 with SPY
Click to Enlarge

The options market is displaying a near historic level of complacency, with implied volatility (IV) now trading at the lowest levels of the year, with a reading in just the 5% percentile.

Low comparative levels of IV are many times prescient signals of a market top. The last two times implied volatility was this low in AAPL stock marked significant short-term highs in Apple.

Low levels of implied volatility also make long volatility option strategies very viable. So while I think the rally in AAPL shares may likely stall, I expect the pullback to be fairly shallow given attractive price-to-earnings multiple (11) and dividend yield (2.3%). I am also certainly less bearish than I was in my last article on Apple when AAPL stock was trading around the $110 level.

So to position for a consolidation period in AAPL, consider this trade:

Apple (AAPL) Stock Trade Idea

Buy the AAPL July $97.50 puts (expire 7/15/16) and sell the AAPL June $97.50 puts (expire 6/17/16) for a $1.20 net debit.

These are both the regular monthly options.

The maximum risk on the trade is $120 per spread. Ideally, AAPL stock closes near the $97.50 level at June expiration for the maximum potential gain.

Make sure to close out the trade if AAPL is below $97.50 on June expiration to avoid any possible assignment risk.

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.

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Tim spent 13 years as Chief Options Strategist at Man Securities in Chicago, four years as Lead Options Strategist at ThinkorSwim and three years as a Market Maker for First Options in Chicago. Tim makes weekly appearances on Bloomberg TV  “Options Insight”, Business First AM “Trader Talk”, TD Ameritade Network “Morning Trade Live” and CBOE-TV “Vol 411” to discuss everything from volatility and option related.


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