It’s time to appreciate the “pause” feature on Apple Inc. (NASDAQ:AAPL). Apple shares are up today on a bullish analyst note, but today’s action only screams louder for a corrective move. For traders, that means a short opportunity on AAPL stock. For longer-term investors, you can consider this a chance to buy discounted merchandise — to be picked up at a later date.
Let me explain.
Investment firm RBC Capital came out Wednesday morning with a bullish note and price target revision for Apple stock. The broker lifted AAPL from a prior (and now “at the money”) $140 estimate to a new price of $155, inferring another 12% of upside.
Behind the raise is Apple’s Services business. The area includes App Store, iCloud, iTunes and Apple Music — all of which should fuel growth and support a higher market multiple for AAPL stock. What’s more, a combination of stronger gross margins and a less cyclical nature for those services should boost the company’s already massive reach and ecosystem.
For its part, RBC sees services revenues of $48 billion to $50 billion within the next three years. The forecast implies “healthy growth” from a higher average revenue per unit (ARPU) or Apple using some of its massive cash stockpile and acquiring growth that way.
The analyst call also points to Apple’s capital allocation, the opportunity for cash repatriation under the new Trump administration and the highly-anticipated iPhone 8 iteration, out later this year, to act as supports for AAPL stock.
But with shares up less than 1% in the face of a pretty supportive call, I’ll ask: Will it really pay to continue being bullish on Apple right now?
AAPL Stock Chart
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That’s not to say the fundamental drivers aren’t there, but Apple has bitten off more than it can chew in the short-term. A lift-off might be coming, but not anytime soon.
In the coming days — and possibly over the next few weeks — my forecast is for AAPL stock to move into a pattern of backing and filling. Support from the cup high of $134.54 is a good initial price target, and implies downside of around 3.5% from here.
Beyond well-overdue profit-taking, a slightly more aggressive (but not unrealistic) corrective move of 7% to 10% would result in Apple stock testing the $126.50-$130 range for support.
So, how do we capitalize?
How to Trade AAPL Stock Here
After reviewing the Apple options board, the AAPL 13 April $136/$134/$130 put butterfly looks attractive.
Priced for a very small debit of 4 to 5 cents with AAPL stock at $139.30, the limited-risk position carries minimal risk if shares fail to drop below $136 (2.4%) over the next month.
The risk control on this variation of the butterfly spread is a nice feature.
Below $136, the position can profit similar to short stock on a move down to $134. At expiration, the potential maximum gain is $1.95 per spread, versus a profit of $2.00 that a more bearish trader going full short would receive.
The real risk for traders interested in this strategy is recognizing the impact of the lower and wider $134/$130 embedded bull put spread. The trader’s expiration breakeven is $132.05, and a maximum loss of $2.05 would occur if AAPL fell below $130 at expiration.
If you believe corrective moves in AAPL stock are meant to be bought, then this dual-purpose play is worth your consideration.
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.
