A strategy idea for options trading investors.

Don’t look now but the king of tech products is breaching its 200-day moving average on the downside. Is this just noise or is it noteworthy? In trying to rank the significance of breaking above or below a specific moving average I like to consider how often it occurs. For example, Apple (NASDAQ: AAPL) has crossed the 50-day moving average (blue line in the chart) approximately seven times over the past three months. Given the frequency with which this occurs a future break of this average won’t hold much significance. Interestingly a cross of the 200-day moving average is a much rarer occurrence.

It has been 551 days since AAPL last closed below its 200-day moving average (hat tip to Bespoke). The fact that it has finally probed below this key moving average after possessing the strength to remain above it for multiple years is therefore noteworthy. While it may not be a harbinger of impending doom for the maker of all “I” gadgets, it does reflect the recent weakness which has taken hold of the stock.

In light of this bearish development, AAPL shareholders may consider tapping into the protective power of options by selling in-the-money calls against their stock position. I offered a similar suggestion to Baidu.com (NASDAQ: BIDU) shareholders (see Hedge BIDU Position by Selling Calls). When selling covered calls traders can influence the amount of downside protection acquired by modifying the strike price selected. In short, the lower the strike price the higher the amount of protection. AAPL shareholders willing to limit their profit potential in exchange for some downside protection may consider the following two covered calls:

Sell to open the AAPL July 320 Call for around $11.70;

Sell to open the AAPL July 310 Call for around $18.60.

Source:  MachTrader

At the time of this writing Tyler Craig had no positions on AAPL.

Follow Tyler Craig on Twitter@TylersTrading.