When considering my previous look at Apple Inc. (NASDAQ:AAPL), I’m reminded of one of my favorite quotes from John Maynard Keynes: “The market can stay irrational longer than you can stay solvent.”
You see, Apple stock is what I like to call a “cult following” stock. In other words, despite being overbought, facing declining iPhone sales, missing second-quarter revenue expectations and issuing third-quarter guidance below the consensus estimate, AAPL stock continues to head higher.
But this “cult” status has some weight behind it. After all, while it controlled just 11% of the smartphone market in 2016, Apple earned 36% of global end-user spending.
Click to Enlarge What’s more, Apple has managed to extend the fervor behind its iPhone and Mac lineup to AAPL stock’s sentiment backdrop.
In fact, 35 of the 46 analysts following AAPL stock rate the shares a “buy” or better, according to Thomson/First Call. That said, the shares are trading just north of their 12-month consensus price target of $152.96. While this typically should place Apple stock in danger of receiving valuation downgrades, Apple may instead be targeted with price-target increases due to the rising hype surrounding the iPhone 8.
There is a major crack in this otherwise heavily bullish sentiment backdrop, however. With AAPL stock trading near all-time highs, Apple options traders have become increasingly nervous. Specifically, the June put/call open interest ratio has ballooned to an annual high of 1.3, with puts being added at a faster rate than calls among back-month options.
A closer look reveals that many of the most popular June strikes are deep out of the money, like the more than 22,000 contracts open at both the $135 and $130 put strikes. While this could be signs that AAPL options traders are betting on a reversal in Apple stock over the next several weeks, it is more likely that speculators are selling put premium in a bet that Apple will stagnate and trade sideways near current levels.
Selling premium doesn’t look like a bad option right now for Apple. For instance, June implieds are pricing in a potential move of about 4% for AAPL stock ahead of expiration — above historical volatility, but not overly so. As a result, the upper bound rests near $161.30, while the lower bond lies at $148.70.
2 Trades for Apple Stock
Put Sell: After getting burned by irrationality before, I’m inclined to side with the bulk of the AAPL options crowd here and sell premium. For those looking to profit from a sideways trend in Apple stock, the June $145 put stands a good chance of finishing out of the money, and was last bid at 64 cents, or $64 per contract.
As always, the upside to this put sell strategy is that you keep the premium as long as Apple stock closes above $145 when June options expire. The downside is that if AAPL trades below $145 ahead of expiration, you could be assigned 100 shares for each sold put at a cost of $145 per share.
Put Spread: Those traders looking to take a risk and potentially profit from a retreat from all-time highs might want to consider a June $150/$155 bear put spread. At last check, this spread was offered at $1.96, or $196 per pair contracts. Breakeven lies at $153.04, while a maximum profit of $3.04, or $304 per pair of contracts, is possible if Apple stock closes at or below $150 when June options expire.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
