Wednesday was one of the worst market days in months, especially the Nasdaq Composite, which lost 2.5%. You can thank Apple Inc. (NASDAQ:AAPL), an overweighted contributor that declined more than 3% yesterday. But fear not — AAPL stock will be just fine.
Traders hit the sell buttons as a reaction to the political headline of the day — namely, the emerging potential for impeachment of President Donald Trump. This has little to do with how many iPhones Apple sells, or how great its iTunes division will do. But bulls do have a lot of recent profits to protect.
One big, red candle doesn’t change a bull thesis, so dips should be considered a buying opportunity into quality names. And given the breadth of the selloff, we had many from which to choose. I usually like to start catching mega-caps first. I was like a kid in a candy store, but I refrained from pigging out, and only picked a few.
After debating over which falling knife to catch, I opted for AAPL stock over Facebook (NASDAQ:FB) mostly because of the Buffett put. The famed investor Warren Buffett buys his favorite stocks on dips, and Apple is a recent addition to his portfolio. This will lend support to my risk when I need it.
He was willing to stick out International Business Machines Corp. (NYSE:IBM) for a long time, so I bet he will be fighting for Apple for a long while.
Before you label me a perma-bull for AAPL, understand that I’ve shared bearish and bullish trades that delivered profits with confidence. In fact, fundamentally, while I do believe in the Apple machine, I have little confidence that CEO Tim Cook is the right guy to keep it successful. But for now, he has iPhone momentum on his side, hiding his mistakes and lack of innovation.
Today, I want to go long on this mini-dip using Apple options while using the Buffett put as my defense.
How to Trade AAPL Stock Here
The trade: Sell the Dec $115 put and collect $1.25 per contract. By doing this, I commit to owning the shares if price falls below it. Although I have a 90% theoretical chance of success, I need to acknowledge that below $113.75, I would accrue losses.
Since I have a 23% price buffer, I will not sell sell upside risk to balance my trade. I am confident that I will be able to successfully navigate the short-term risks.
If I am not able to own AAPL stock, then I should not sell naked puts. Instead I would use a credit put spread to limit the risk yet still be able to yield 8% on risk. Compare that with having to risk $150 per share right now, and having no room for error, then needing Apple to rally to $162 only to match the spread.
Learn how to generate income from options here. Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @racernic and stocktwits at @racernic.