After a stunning 6 day, 13% rally off the Sept. 12 intraday low of $102.53, shares of Apple Inc. (NASDAQ:AAPL) are finally showing signs of fatigue. With the stock overbought and overloved, I expect Apple shares to have trouble moving significantly higher from the current $113.58 level.
On a longer-term basis, the stock has some overhead serious technical resistance at the $120 level. Apple stock is also getting overbought on a 9 day RSI basis. Previous instances when shares were this overbought proved to be short-term tops.
Click to Enlarge Looking at Apple’s shorter term, yesterday’s price action was also indicative of a top. Shares traded just past the $116 level, making a new recent high.
AAPL then reversed swiftly, selling off sharply to close both lower and on the lows of the day at $113.58. This type of key reversal day is many times an indication that the trend is coming to an end.
Following the recent monster rally, shares of Apple Inc. are no longer trading at a discount to the overall market.
Click to Enlarge Looking at the NASDAQ OMX Alpha AAPL vs. SPY Index (INDEXNASDAQ:AVSPY), which measures the performance of Apple versus the SPDR S&P 500 ETF Trust (NYSEARCA:SPY), one can see the recent relative out performance of AAPL stock to the S&P 500 Index.
Fundamentally, Apple stock is near its highest price-earnings ratio of the year. More importantly, AAPL stock is yielding just 2%, near the yearly low. With growth assuredly slowing, Apple’s dividend yield has become increasingly important.
The last time shares traded below 2% on a yield basis was mid-April, which marked a significant top in Apple stock. I look for the stock to have trouble piercing this 2% yield level with any conviction.
In a note released yesterday, J.P. Morgan analyst Rod Hall pointed to heavy discounting as a key factor in the strong launch of the iPhone 7. Mr. Hall also said he believed that the initial demand surge will borrow heavily from third quarter sales. With a $107 price target (but strangely an overweight rating), he certainly is less than ebullient on shares at current levels.
So with AAPL overbought and finally showing signs of slowing, a bear call spread seems to make sense.
AAPL Stock Options
Buy the Oct $123 calls and sell AAPL Oct $120 calls for a 34 cent net credit. These are the traditional monthly options that expire Oct. 21, before the earnings date of Oct. 25.
Maximum gain is $34 per spread and maximum risk is $266 per spread. Return on risk is 12.78%. I would look to close out the position on a meaningful break above the $120 resistance level, while letting the spread expire worthless if Apple stock remains well-behaved.
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.
