AAPL – Use Credit Spreads for a Sweet Bite of Apple Stock

by John Kmiecik | December 5, 2013 10:53 am

If you have traded or even thought about trading, odds are that you have looked at Apple (AAPL[1]) stock at some point. Traders seemed to be fascinated with the stock — and for good reason. AAPL stock has given traders plenty of opportunity to profit over the years. Here’s a trade idea that might just be another one of those opportunities, with a put credit spread on AAPL.

Apple (AAPL — 565.57): Put Credit Spread

The trade: Sell the Dec 535/540 Put Credit Spread (selling the Dec 540 put and buying the Dec 535 put) for 70 cents or better.

The strategy: The maximum potential profit for this trade is 70 cents if AAPL is trading above $540 at December expiration. The maximum loss is $4.30 ($5 – $0.70) if AAPL is trading below $535 at December expiration. Breakeven is $539.30 at expiration based on a credit of 70 cents.

The rationale: China Mobile (CHL[2]) won approval to start commercial service on the world’s largest fourth-generation wireless network. This is one of the key components for the company to overcome so that it can offer Apple’s iPhones to China Mobile’s 750 million subscribers. In fact, analysts estimate that China Mobile might be able to sell about 17 million iPhones in 2014. This would obviously be a big boost to Apple’s revenue estimates. It appears that market participants have liked what they’ve heard, because the stock has been on quite the roll higher.

Click to Enlarge

Taking a look at the chart, the stock has screamed higher after trading around the $520 area for about a month. Since AAPL broke a pivot area (prior pivot high from October) at around $540, the stock has barely slowed down. It would not surprise me if Apple stock did have a slight correction at some point.

The $540 area might now act as possible support and keep the stock from moving below that level if the correction does materialize.

The implied volatility of the options has also increased recently, which ultimately helps the sellers of credit spreads like this.

If you have traded Apple stock before, it might be worth another look. And if you haven’t … now might be the time to start!

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[3].

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

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