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Spread Out and Catch the Falling AAPL Knife

Limit your risk with this bull put spread on Apple stock


The post-election stock market bloodbath certainly isn’t receiving any help from Apple (NASDAQ:AAPL). The beloved tech behemoth has fallen just under 24% since peaking in mid-September at $705. In the past two days alone, AAPL is down a quick 7.7%.

From a technical perspective, the monthlong deluge of selling has done some damage. AAPL is now significantly below its 200-day moving average — an area it hasn’t seen since the dark days of the 2008 financial crises. Given the recent decline, it appears AAPL has stumbled into a negative feedback loop of liquidation where past price decreases entice more traders to sell, which causes further price decreases.

Of course, no stock moves in a straight line, and most selloffs eventually terminate — particularly those occurring in a stock with fundamentals as promising as AAPL.

Stocks that are approaching a climactic bottom often leave clues in their wake that indicate the selling frenzy is close to termination — at least in the short run. Volatility, as measured by the size of the daily ranges, often rises dramatically, which reveals the panic of shareholders unloading their positions willy-nilly. Volume also tends to crescendo as the masses finally hit their pain thresholds and collectively puke up their shares.

Click to Enlarge
Fortunately for those looking for a tradable bottom in AAPL, both clues have cropped up in the past few days as seen in the accompanying chart.

First, take note of the increased size of Thursday’s candle coupled with the lift in the Average True Range (ATR) indicator. Second, notice how the volume in the trading session reached its highest levels since April.

When trying to catch a falling knife like AAPL, options provide a variety of high-probability, limited-risk strategies to play the bounce. That way if you’re a day or two early, you won’t get knocked out before the expected rebound finally transpires.

For example, traders could sell a January 450-440 bull put spread for $1.15. Provided AAPL remains above $450 by January expiration, the put spread will expire worthless, allowing you to capture the entire $1.15 profit. In the event AAPL does experience a quick snap-back in the coming days, you might even be able to exit early with the majority of your profits in tow.

The devil for a trade like this really lies in the timing. If AAPL is going to continue cascading lower in the next day or two, there really isn’t any reason to enter just yet. I would wait for the stock to break above a prior day’s high or at least break above intraday resistance before selling the put spread.

As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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