For Apple Inc. (NASDAQ:AAPL), the world’s largest publicly traded company, now is the time to start believing that this time isn’t any different. AAPL stock is going through one of its familiar plateaus,
A month ago, I wrote about Apple’s prospects a couple days in front of its earnings confessional. I wasn’t exactly bearish. You can still build a great bull case around AAPL, including Services, the anxiously awaited iPhone 8 and its enormous war chest.
I was merely cautious because of the price chart.
Before the report, modest secondary price warnings following a strong run in AAPL stock were louder than the bullish possibilities, such as the solid post-earnings reactions from Apple’s other “maligned friends” in Silicon Valley like Amazon.com, Inc. (NASDAQ:AMZN) and Alphabet Inc (NASDAQ:GOOGL).
My concerns ultimately were trumped by the optimists, though. Apple shares are up about 7% over the past month and hit new all-time highs despite a fairly mixed earnings report and weaker-than-expected guidance.
Is Apple sandbagging? Is Wall Street still jazzed about the iPhone 8 becoming the next big thing for this generation of investors? Is it all that cash? I’m honestly not sure.
But it doesn’t matter. Or at least, Apple’s stock chart matters more.
AAPL Stock Chart
Click to Enlarge
What I’m referring to is Apple’s eerily similar corrective cup patterns of roughly two years in length, each sporting nearly identical price drops in dollar terms.
The first formation’s breakout led to a rally in AAPL stock that stalled around the 1.62% Fibonacci extension. This extension is highlighted in yellow. The churn around this area eventually gave way to Apple’s second corrective cup.
Following the more recent pattern breakout, shares are about 6% or 7% removed from hitting the 1.62% Fibonacci extension. There’s also a Fibonacci-based two-step or mirror move conceived from the two base lows, which would be fulfilled near $169.50.
Also, stochastics (above the price chart) are no longer confirming this rally.
Will the resistance area bear fruit and send Apple lower? It’s hard to know for sure. But I can offer you a solid limited-risk opportunity via AAPL options.
How to Trade AAPL Stock Here
Apple has the potential for weakness, but I like the name longer-term on a pullback. Thus, I suggest a low-cost, modified and targeted long put butterfly.
Buy the 30 June $148/$145/$141 put butterfly for 18 cents with AAPL stock at $153.75.
What does this spread position offer?
First, if the expectation of lower prices in Apple shares is wrong or early, the spread expires worthless and the debit is forfeited. But given the inconsequential cost for this position, the modified butterfly would certainly keep your losses small.
If AAPL stock does begin to decline, on an expiration basis, the trader will start to profit below $147.82. But the real sweet spot is if at expiration AAPL is trading at $145. That’s a correction of just under 7% from the recent all-time-high and would turn the 18-cent debit into a profit of $2.82, or return of 1,567%!
Should a larger correction take hold, this modified butterfly maintains a downside breakeven of $142.18 in Apple stock. That amounts to a corrective move of around 8.5%.
If Apple shares drop below $141, the spread is out $1.18. This is the result of the embedded $145/$141 bull put spread expanding to $4 versus the tighter and profit-generating 3-point-wide $148/$145 bear put spread. Before you get too concerned, realize losses are contained, so and that max loss would require a large move of just below 10%.
If you’re a bullish investor looking to buy at a discount with total risk control, this trade on AAPL stock is for you.
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.
