The Apple Inc. (NASDAQ:AAPL) Spring Forward event was supposed to get investors in a rallying mood last week.
That’s not quite how things went.
There were big expectations for the Apple Watch, and while consumer reaction wouldn’t indicate that the watch missed the mark, there apparently wasn’t enough to get investors excited.
AAPL has listed lower by a couple of percentage points since the event, and as a result, Apple stock seems to be in a bit of a downtrend — one that investors can play for a little profit.
What Happened at Spring Forward?
It’s my humble opinion, but I think Apple lacked the element of surprise.
Tim Cook has a very different style than Steve Jobs had when it comes to product releases. When Steve Jobs released a product, he built suspense by not telling us anything at all. Sure, there were occasional leaks, but often, we didn’t even know what type of product would come out during a particular event.
Tim Cook, on the other hand, leaked quite a bit of information in an attempt to build the “I want to see that!” vibe with the audience.
As a member of the audience myself, I have to say, the new approach took away all of the excitement with regard to the Apple Watch. It’s a good guess that Wall Street felt the same way.
After reaching a high of $128.56 per share at 2 p.m., AAPL started to fall dramatically as day traders pulled back. By the end of the day, Apple finished just barely in the black — almost like there was no event at all. Since then, it’s off some 2%.
How to Take Advantage of the Short-Term Downtrend in Apple Stock
When big companies like AAPL start to trend in one way or another, it’s possible to follow the trends and earn profits. No matter which way Apple stock is trending, the process of taking advantage of the trend is essentially the same. Here are the three steps to follow, using the candlestick charts from March 10 as our guides.
Step #1: Determine Where the Trend Is Going: The first thing we’ll do is determine the direction of the trend. Looking at the candlestick chart below, it’s easy to see that overall for the day, we saw a downward trend. I’ve drawn the trendline to make it more apparent.
Step #2: Determining Where Risk Is Minimal: The next chart is just about the same, but I’ve drawn this to show you only the two most prominent peaks in the trend through the end of the chart. This is how we determine the best entrance points. When AAPL hits or surpasses this line, chances are the stock will fall in value shortly thereafter. Thus, this is the best time to either short Apple stock or purchase put options on it.
Step #3: Purchasing Your Option – Fast forward throughout the day, and you’ll see the Apple stock price reaching a point very close to the trendline around 2:20 p.m.
Once a stock’s price comes back up against a trend line like this, it’s time to buy your put option.
If you buy options based on trends, choose strike prices that are close to the trend line (and thus require less risk). To determine the optimal strike price, draw a line from the bottom of the trend, now draw a line between the two trend lines on your chart. The price it points to will most likely be a great choice.
In this particular case, you would buy the monthly March $125 put for $1. To profit, the value of Apple in this case would need to fall below $124 before the option expires. At any point below $124 per share, you can buy shares at market value, then generate a profit by selling them back at $125, per your put option.
Just remember: Should AAPL’s price rest above $125 when the put expires, the contract will expire worthless, and you’ll be out the price of the put.
Final Thoughts
AAPL is a stock that consistently shows wild trends like the one we saw last Tuesday. Keep your eyes on Apple’s charts, and you’ll soon find another trend worth playing.
Joshua Rodriguez is the owner and and founder of CNA Finance. As of this writing, he did not hold a position in any of the aforementioned securities. To contact Joshua, email Joshua@CNAFinance.com or follow him on Twitter.
