AAPL – Start the New Year Right With Butterfly Spreads on Apple

by John Kmiecik | December 30, 2013 8:06 am

A new year is just around the corner, and traders need to start thinking about what they can do to improve their trading results — even if they had a profitable year. If the results were not what you expected, it’s time to clean the slate and make adjustments. Otherwise, your results might never change. Here is a trade idea on Apple (AAPL[1]) that can start you in the right direction.

Apple (AAPL — $560.09): Butterfly Spread

The trade: Buy the AAPL Jan 560/575/590 Call Butterfly Spread (buying the Jan 560 call and selling 2 Jan 575 calls and buying the Jan 590 call) for $2.75 or less.

The strategy: The maximum potential profit for this trade is $12.25 if AAPL stock is trading right at $575 at January expiration. The long 560 call option would have $15 worth of premium and the other options would expire worthless. Then the cost of the trade is subtracted ($15 – $2.75). The maximum loss is $2.75 or what was paid for the spread if AAPL stock is trading below $560 (all options expire worthless) or above $590 (all options would have to be bought or sold) by January expiration. Breakeven is at $562.75 and $587.25 at expiration based on a cost of $2.75.

The rationale: Apple is scheduled to announce earnings on Jan. 21, which falls after January expiration. AAPL revenues came to more than $170 billion for the fiscal 2013, so management has a high bar to hurdle. The latest buzz from Apple is a possible smartwatch. It has been debated just how much this will add to Apple’s bottom line, but the jury is still out. Apple CEO Tim Cook has mentioned before about the “halo effect” of their products meaning for example that iPhone customers often branch out and buy Macs and iPads. This could be another one of those products if it hits the market.

Click to Enlarge
This trade idea is a long butterfly but set up to profit from a move higher.

Taking a looking at the chart, Apple stock moved higher before actual earnings were announced in its past two reports. This trend needs to continue for this trade to profit.

AAPL stock traded just above $575 in early December and that might be an area the stock might challenge again, which is why the $575 area was chosen for maximum profit at January expiration.

Apple currently is sitting right at a support area at $560 and might just be able to reverse off of support and move higher. A bearish sigh for the stock is if it broke down below the support and continued to move lower. Happy New Year!

As of this writing, John Kmiecik did not hold a position in any of the aforementioned securities. Get a free trial of John’s live options trading room here[2].

  1. AAPL: http://studio-5.financialcontent.com/investplace/quote?Symbol=AAPL
  2. free trial of John’s live options trading room here: http://markettaker.com/options_insider_trial/

Source URL: https://investorplace.com/2013/12/aapl-stock-butterfly-spread/
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