Exploit the AAPL Breakout with Call Spreads

by Tyler Craig | June 13, 2012 12:24 pm

The market movements of recent days are looking more and more like a giant game of ping pong between the bulls and bears. The alternating up-day, down-day, up-day, down-day routine is enough to make most spectators dizzy. Fortunately, underneath the surface, a few select stocks are building constructive bases that could give rise to a renewed advance in prices.

Apple Inc. (NASDAQ:AAPL[1]) in particular has been coiling beneath its 50-day moving average and looks primed for an upside breakout that could propel the stock price to its next resistance level, at $620.

Perhaps the biggest deterrent to investors interested in accumulating bullish exposure to the king of the tech space is its hefty $578 price tag. Fortunately, the options market provides numerous ways to structure AAPL trades for dirt cheap.

The bull call spread provides a straightforward directional bet that AAPL will rise in the coming months. It consists of buying a lower strike call while selling a higher strike call of the same expiration month. The trade is initiated at a debit that represents the maximum risk. The maximum reward is limited to the distance between strikes minus the initial debit.

Currently. the July 575-585 call spread can be purchased for $4.90. Consider it a bet that AAPL rises above $585 by July expiration. If the expected rise does transpire, the call spread could return up to a $510 profit ($5.10 x 100) — over a 100% return. Of course, if AAPL stays beneath $575 at July expiration, the call spread could incur its max loss of $490.

Traders looking to take the more conservative route might consider buying the August 575-585 call spread instead. The extra month provides more time for AAPL to make the expected move.

Click to Enlarge

Source:  MachTrader

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

  1. AAPL: http://studio-5.financialcontent.com/investplace/quote?Symbol=AAPL

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