Short-Term Apple Inc. (AAPL) Negativity Offers Opportunities

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The trading situation has shifted sharply for Apple Inc. (NASDAQ:AAPL) during the past two weeks. When I last looked at Apple stock on Aug. 8, AAPL looked ready to take out resistance at $110 and extend its post-earnings rally toward $115 in short order.

Apple Stock: Short-Term AAPL Negativity Offers Opportunities

While the long-term bullish outlook for AAPL stock remains largely intact, the risk of a market blowoff and short-term decline due to increased expectations for a Federal Reserve interest-rate hike makes the case for a shift in short-term options strategies.

Buyers were already somewhat skittish heading into this Fed-dominated week. Apple stock was lingering in overbought territory, and traders were reluctant to push the shares past $110. AAPL was in the process of consolidating below $110 when selling pressure ramped up, finally pushing Apple stock below support at its 10-day moving average yesterday.

What’s more, the shares are set to decline further today, putting the 20-day trendline at risk.

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AAPL has closed below both its 10-day and 20-day moving averages twice in the past three months.

The most recent breach, on July 26, saw Apple stock also close below its 50-day trendline, but earnings the following session prompted a sharp rebound. The June 14 breach, however, had no earnings report to save the shares, and AAPL went on to shed 5.5% before finally bottoming out near $92. With no earnings report this time either, Apple stock will be at the mercy of the market’s reaction to Janet Yellen’s speech tomorrow.

On the sentiment front, Zacks ratings data has also shifted slightly, with the number of “buy” ratings dropping from 28 to 26, though the 12-month consensus price target for Apple stock has ticked fractionally higher from $124.06 to $124.11.

The biggest shift in AAPL sentiment comes from the speculative options crowd. On Aug. 8, the put/call open interest ratio for the front two months rested at 0.85.

Following August expiration last week, this ratio — now the September/October ratio — has fallen dramatically to 0.62. But when we zero in on the weekly Sept 2 series, i.e., those options most influenced by tomorrow’s Fed speech, the ratio soars to 1.07.

The message options traders appear to be sending is that Apple stock is expected to decline next week, possibly alongside the broader market, but rebound heading into the latter half of September.

Despite the negative short-term outlook, weekly Sept 2 series implieds are only pricing in a potential move of about 2.2%. This places the upper bound at about $110, while the lower bound lines near $105.50. Clearly, $110 is an important hurdle for Apple stock to clear if it is to extend its recent gains, while $105 is the only speed bump keeping AAPL from testing $100.

2 Trades for Apple Stock

Put Spread: Yes, back on Aug. 8 I recommended an AAPL September $110/$115 bull call spread — but the technical and sentiment indicators were much different and more positive for Apple stock at that point. Depending on the market’s reaction to tomorrow’s Fed speech, this trade could still be profitable. That said, with Fed headwinds rising, AAPL could be at risk of falling another 2% to 3% on a negative reaction tomorrow.

Traders looking to take advantage of a potential short-term decline in Apple stock might want to consider a weekly Sept 2 series $106/$107 bear put spread. At last check, this spread was offered at 41 cents, or $41 per pair contracts. Breakeven lies at $106.59, while a maximum profit of 59 cents, or $59 per pair of contracts, is possible if Apple stock closes at or below $106 when the options expire at the end of next week.

Put Sell: Along with rising trepidation about a post-Fed decline, the price of AAPL puts has risen. Bargain hunters should emerge on Apple stock as the shares draw nearer to $100, making this a prime strike to target for a short-term put sell position. At last check, the weekly Sept 2 series $100 put was bid at six cents, or $6 per contract.

As always, the upside to this put sell strategy is that you keep the premium as long as Apple stock closes above $100 when these options expire at the end of next week. The downside is that if AAPL trades below $100 ahead of expiration, you could be assigned 100 shares for each sold put at a cost of $100 per share.

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

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