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SPY Takes on Apple in New Index

A way to bet on AAPL’s return to out-performance


A strategy idea for options trading investors.

Apple (NASDAQ: AAPL) enthusiasts are well aware of the tech behemoth’s recent lackluster performance. Since the start of June it has exhibited relative weakness versus the broader market virtually every day. Insult was added to injury when yesterday’s drop brought the stock to a new low for 2011. Interestingly, the NASDAQ OMX Alpha AAPL vs. SPY Index (NASDAQ: AVSPY) cratered to a new low yesterday as well. This might be an opportunity for those believing AAPL’s weakness is an aberration unlikely to continue.

For those otherwise unfamiliar with these newer Alpha Indexes, a brief review is in order. The idea behind the Alpha Indexes and the accompanying option contracts was to provide a trading vehicle that could be used to isolate the relative performance of a company. Rather than betting on a rise or fall in the marketplace, these index options offer the ability to bet on whether a company is going to outperform or under perform the market. In the case of out performance the index will rise; in the case of underperformance the index will fall.

Last November NASDAQ OMX (NASDAQ: NDAQ) also launched the:

NASDAQ OMX Alpha GLD vs. SPY Index (NASDAQ: GVSPY); shows how SPDR Gold Trust has performed compared to the SPDR S&P 500 ETF;

NASDAQ OMX Alpha TLT vs. SPY Index (NASDAQ: TVSPY) shows how treasury notes have performed compared to the SPDR(R) S&P(R) 500 ETF;

NASDAQ OMX Alpha C vs. XLF Index (NASDAQ: CVXLF) shows how Citigroup has performed compared to the Financial Select Sector SPDR(R) Fund;

NASDAQ OMX Alpha EEM vs. SPY Index (NASDAQ: EVSPY) shows how iShares MSCI Emerging Markets ETF has performed compared to the SPDR(R) S&P(R) 500 ETF.

Most charting platforms have long provided the ability to measure relative performance via indicators like Comparative Relative Strength, so the idea of tracking relative performance isn’t new. It’s the notion of being able to bet directly on this performance using options that presents many interesting new possibilities.

Traders can view the performance of AVSPY and the other indexes back to October.

Since then AVSPY has developed a consistent behavior of oscillating back and forth as AAPL stock alternates between periods of underperformance and out performance.

An effective indicator for this type of behavior which I’ve included in the chart below is the Bollinger Bands. The Indexes’ mean reverting nature coupled with the ability of these Bands to identify extremes in price makes them a potent combo. Yesterday’s breach below the lower band may signal AAPL’s recent underperformance is close to reaching some type of inflection point.

One idea for betting on a return to relative strength by AAPL is to structure a bullish option trade on the AVSPY. A brief assessment of the liquidity offered in these options left me mildly disappointed. Most strike prices offered in the July cycle have accumulated little open interest thus far. As such the bid-ask spreads are still wider than I’d prefer. That said option traders may still be able to get a good fill with limit orders and some patience.

Traders may consider entering the AVSPY July 126-130 Bull Call Spread for around a $1.95 debit. To enter the trade buy to open the July 126 call option while selling to open the July 130 call option. The risk is limited to the initial debit paid ($195) and the potential reward is limited to the difference between the strike prices minus the debit ($205).

Source:  MachTrader

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

Follow Tyler Craig on Twitter@TylersTrading.

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