Apple Inc. (NASDAQ:AAPL) is looking better and better both off and on the AAPL price chart. But following a massive rally, a well-positioned bull put spread trumps buying Apple stock near-term.
It has been almost exactly one month since I penned some bullish analysis on AAPL on Jan. 10. At the time, there were plenty of potential headwinds for Apple stock. And to be honest, many of those factors, ranging from trade, to China, to a successful transition as a software company, could still present issues for Apple.
Nevertheless, I didn’t mind throwing caution to the wind given a dose of contrarianism, a decent Apple stock chart and firm control on risk using an April bull call spread. And I’m glad I did, as Apple stock has gone on to make its investors very happy and in more than one way.
Back on Jan. 31, Apple managed to delight Wall Street by not only beating top- and bottom-line views, but also in the quality or tire-kicking aspect of the results. There were typical highlights, such as $18 billion in profits for the quarter, 78.3 million iPhones sold and a record cash hoard of $246 billion, whose size is simply amazing. But this report was also much more than that for Apple stock.
The company showed a return to growth spearheaded by executing with its increasingly important Services business that includes the App Store, iCloud, iTunes and Apple Music.
Apple also dropped hints of a major media acquisition, expanding AAPL’s reach into smart homes, and, somewhere in the dazzling dog-and-pony show, the buzz over this year’s forthcoming iPhone 8 iteration.
Another way the company has made its investors very happy of late has been on the Apple stock chart.
Apple Stock Weekly Chart
A month ago, I discussed a bullish cup-and-handle pattern which had just cleared the 62% retracement level as Apple stock broke out on its daily price graph. The area is highlighted in yellow on the provided weekly stock chart of AAPL.
Now, with shares up about 11% and focused on the larger time frame, a similar but more substantial corrective cup formation has emerged since Apple stock hit its all-time high in 2015.
Looking forward, there’s nothing to stop Apple stock from breaking out of the cup -pattern and essentially forgoing the development of a handle consolidation on the AAPL chart. But we’re inclined to think that’s not going to happen.
In our view, an overbought stochastic and lack of an immediate catalyst for AAPL shares following a strong run will likely lead to a failed attempt at breaking out or simply a bit of price consolidation to neutralize conditions before a successful move into higher ground.
AAPL Stock Bullish Strategy
Looking at the Apple stock options board and given the discussed view, the Weeklys 3 March $129/$126 bull put spread is interesting.
Priced for 50 cents, the seller of this put spread is able to collect the full credit as long as AAPL is above $129 at expiration three weeks from now. The margin of safety or downside buffer is roughly 2.3% with Apple stock trading near $132.05.
If AAPL shares are above $129 at expiration, the collected credit amounts to a non-annualized return of 20%.
In the event Apple stock falls and the vertical goes in-the-money, the trader can begin accumulating stock for no worse than a price of $128.50. Even better, the trader could possibly get a much lower effective purchase price if AAPL tanked through the spread.
For instance, if AAPL were to fill the daily chart earnings gap and trade down to $121.50 in the next three weeks, through either assignment or closing the spread and simultaneously buying stock; the trader is at worst, out $2.50 or roughly 2% of Apple’s share price.
Factoring in the loss, if this trader wished to buy AAPL on the extreme weakness, the initial purchase price would net out to $124 ($121.50 AAPL + $2.50 vertical loss). That compares favorably to a trader purchasing AAPL today for $132 and a position that would be out 8.5% on paper.
Bottom line, with income potential and the opportunity to purchase Apple stock with a margin of safety that includes stronger value and limited risk, this bullish AAPL put spread makes for a solid alternative to simply buying shares right now.
Investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT.
