by Tyler Craig | January 29, 2014 11:46 am
Despite besting the Street’s earnings estimates Monday, Apple (AAPL) was punished, with investors sending Apple stock down a whopping 8% the next morning. AAPL shares are continuing lower in early morning trading today, and even breached the $500 level momentarily, adding further angst to investors.
While existing Apple stock holders might be bemoaning their ill fortune this week, prospective shareholders are perking up, as the selloff is putting AAPL on sale.
In his recent comments, Todd Bunton of Zacks Investment Research concluded:
“After Tuesday’s selloff, shares of Apple stock was trading at just 7.5x the current 2014 Zacks Consensus Estimate, excluding its cash. Granted, the consensus is likely to come down a bit, but even at 8 or 9x forward earnings, Apple stock looks very cheap next to its peers and even the S&P 500.”
In light of Apple’s increasingly attractive valuation levels, further downside in AAPL stock should be somewhat limited in the coming months. While shares might not stage some type of immediate recovery, with options trading, we can structure trades that profit even if Apple stock meanders sideways for a spell as it works off the psychological damage dealt by this week’s downdraft.
Before we delve into the details of an options play, let’s first assess the technical posture of AAPL to see if the charts can provide further color to our analysis.
Despite the ugliness of this week’s plunge and subsequent entrance of AAPL’s daily chart into a downtrend resting beneath the 50-day moving average, the bulls still hold the upper hand longer-term. The rising 200-day moving average confirms that the larger trend remains higher, suggesting deeper pullbacks are still buying opportunities. This pivotal moving average also might act as a support level, stemming the current decline in Apple stock near the $480 level.
In a situation such as this, selling out-of-the-money bull put spreads is the way to go. Using options with a little more time until expiration will allow us to widen the profit zone, as well as provide more time for the current dip in AAPL to be bought.
Instead of using weekly options, we could use the March monthly options with 51 days to expiration.
Sell the AAPL March 460-455 put spread for 85 cents credit. The max reward is limited to the initial credit of 85 cents and will be captured if Apple stock remains above $460 by expiration. The max risk is limited to the distance between strikes minus the net credit, or $4.15.
As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.
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