Back in mid-May, I expressed concern that the shares of Apple Inc. (NASDAQ:AAPL) were getting ahead of themselves. You see, AAPL stock is one of those picks that attracts a cult following — one that irrationally bids a stock higher despite warning signs that would kick normal stocks lower.
On June 9, analysts at Bank of America agreed. They expressed concern that the newly dubbed “FAAMG” group — which included Apple, as well as names like Facebook Inc (NASDAQ:FB) and Google parent Alphabet Inc (NASDAQ:GOOGL) — were all overvalued and due for a possible correction. The research note proved to be self-fulfilling, as Apple shares plunged in response.
When the dust finally cleared a week later, AAPL stock had shed more than 9% and was trading just north of support in the $140 region.
A correction was needed. But Apple’s may have come too far too fast, as the shares are now hovering just above oversold territory, as indicated by their 14-day Relative Strength Index (RSI) reading.
For those of you following my May 12 trade recommendations on AAPL, congratulations! The Jun $150/$155 bear put spread hit its maximum profit target resulting in about a 55% return.
The Jun $145 put sell, however, is a problem if you aren’t interested in owning shares. Apple closed below $145 when June options expired, meaning you may have been assigned AAPL if you didn’t close out the position ahead of time.
If this is you, and you don’t want to own Apple stock, I have a solution in today’s trade recommendations. If it’s not … well, I have something for you, too.
Sentiment and Options
Click to Enlarge Looking at Apple’s prospects for next month, there is plenty of upside available for the beaten-down shares.
For starters, iPhone 8 production appears to have started — with a delivery date rumored for October. What’s more, reports are emerging that the device is causing component shortages — a sign that demand for the device is expected to be strong.
Regardless of analyst unit expectations, iPhone launches are always a significant driver for AAPL stock, and any more details on the coming launch could be a bullish driver for the shares.
Meanwhile, despite some groaning in the financial media, 33 of the 46 analysts following Apple still rate the shares a “buy” or better, according to Thomson/First Call. There have been a couple rare downgrades in the past month, but I would call this healthy given the overwhelmingly bullish outlook Apple sported before.
As more data emerges on the iPhone 8, look for bullish notes to begin to filter in.
Turning to AAPL options activity, we find that the speculative group has grown strikingly bullish compared to opinions in mid-May. Specifically, the July put/call open interest ratio now rests at 0.68, down sharply from the equivalent June put/call OI ratio of 1.30 taken on May 12. It seems that Apple’s correction not only blew off some much needed steam on the technical front, but it also reset the sentiment outlook in the options pits.
Overall, July implieds are pricing in a potential move of about 4.15% for AAPL stock ahead of expiration. While this reading is above historical volatility for AAPL, it remains in line with the stock’s implieds for the past month given the price gyrations in the tech sector. As a result, the upper bound rests near $151.08, while the lower bound lies at $138.92.
2 Trades for AAPL Stock
Call Sell (Covered): If you were assigned shares due to selling the Jun $145 put last month, the easiest way to divest these shares (assuming you don’t want to hold onto your position) is to sell a just out-of-the-money near-term call — like the Jul $146 call.
This call will allow you to sell AAPL stock for a small profit at $146 per share if the shares trade north of this strike, and it will net you a premium — which last stood at $3.02, or $302 per contract.
If Apple doesn’t trade north of $146, which I would be surprised, you can repeat the process next month. Also, if $146 is a touch too low for you, or you are looking for larger returns, feel free to adjust the strike price higher accordingly.
Call Spread: With the overbought condition out of the way, and expectations set a bit more realistically, AAPL stock should now be able to move higher with more certainty. Traders looking to capitalize on a continued bounce back from June’s sell-off might want to consider a Jul $150/$155 bull call spread.
At last check, this spread was offered at 93 cents, or $93 per pair of contracts. Breakeven lies at $150.93, while a maximum profit of $4.07, or $407 per pair of contracts, is possible if Apple stock trades at or above $155 when July options expire.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
