There’s no doubt that Apple Inc (NASDAQ:AAPL) has been on fire lately. AAPL stock is up roughly 24% since November, and shares recently popped more than 8% following a solid first-quarter earnings report.
In fact, Apple’s year is shaping up to be a banner one — especially if the iPhone supercycle comes to pass for the iPhone 8, as many analysts are predicting.
But while the long-term looks rosy for AAPL stock, there is plenty of short-term risk in the shares right now.
Click to Enlarge Apple’s impressive run and earnings surge has put shares well into overbought territory. Additionally, AAPL stock is struggling to pull away from the gravity of $130 — an area rife with heavy options open interest in the February and March series.
Furthermore, AAPL stock has outrun support from its 10- and 20-day moving averages — trendlines that provided key support throughout the back half of Apple’s late 2016 rally. Currently, the 10-day trendline lies near $125, and a correction back to this region would not be unthinkable should a round of profit taking set in.
There are short-term sentiment risks for AAPL stock as well. Thomson/First Call reports that 41 of the 49 analysts following Apple rate the shares a “buy” or better, with only one “sell” rating to be found.
That’s plenty of room for adjustment.
And with Apple drawing near to the consensus 12-month price target of $139.07, we could see a few brokerage firms downgrade AAPL stock to hold in the next month or so to bring expectations back in line — similar to what Barclays did back in late January, cutting AAPL to “equalweight” from “overweight.”
Looking at Apple options, speculative traders appear to be preparing for just such a correction. Typically, Apple’s put/call open interest ratio for the nearest two months rests in the 0.6-0.7 range, with a heavy focus toward call OI. The current February/March ratio, however, rests at 0.9, with puts gaining considerable traction and hinting at potential short-term weakness for AAPL stock.
As for the magnitude of the anticipated move, March implieds are pricing in the potential for a nearly 4% rise or fall in Apple stock ahead of expiration. That places the upper bound near $135 and the lower bound near $125.
Given Apple’s reluctance to continue to move higher in the wake of last week’s earnings, a correction to the stock’s 10-day moving average near $125 could be in the cards.
2 Trades for AAPL Stock
Put Spread: Those traders looking to profit from a short-term drop in Apple might want to consider a March $125/$130 bear put spread. At last check, this spread was offered at $1.28, or $128 per pair contracts. Breakeven lies at $128.72, while a maximum profit of $3.72, or $372 per pair of contracts, is possible if AAPL stock closes at or below $125 when March options expire.
Put Sell: If you’re not willing to bet directly against Apple stock at this point — and with the shares on a hot streak now, I wouldn’t blame you — then we can turn that put spread into a more neutral play by just selling the March $125 put. At last check, this put was bid at 68 cents, or $68 per contract.
As always, the upside to this put sell strategy is that you keep the premium as long as Apple stock closes above $125 when March options expire. The downside is that if AAPL stock trades below $125 ahead of expiration, you could be assigned 100 shares for each sold put at a cost of $125 per share.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
