A massive counter-rally into resistance is sweet news for bears in Apple (AAPL) looking for fresh, technical incentive to plant a position.
And we’ve got a trade on AAPL stock that should help traders take a smarter bite out of Apple shares with more confidence in an ultra-volatile market.
It was just more than two weeks ago when this strategist laid out the framework for the bear case in AAPL stock due to increasing worries over future growth and a chart made to order for a bearish spread entry. Now, following what has been perhaps the most volatile up-and-down week on record in the broader market, Apple shares are once again ripe for a bearish spread.
AAPL stock options spreads can allow for a more flexible profit range and defined risk-to-reward profile that’s not possible with a simple short.
I’ll explain, but first let’s look at the chart of AAPL stock.
AAPL Stock Daily Chart
With AAPL stock having gained about 23% from this past Monday’s early swoon, Apple now is once more in position technically to consider a bearish spread.
Not only has the five-session drive off AAPL’s lows shaped a fragile V-bottom pattern, but Apple stock is now testing resistance at the 50% retracement level.
AAPL shares also face price resistance from a downtrend line and prior congestion surrounding our highlighted candlestick up to the 62% Fibonacci level. Our view is this area can be seen as strong technical opposition.
Lastly, shares of AAPL stock are in bear territory below the long-term 200-day simple moving average. While widely watched, moving averages can allow for a false sense of security by traders; in Apple’s case, the moving average has worked quite well for bears.
Over the last three or so weeks, AAPL’s long-term moving average first acted as a trigger for a technical breakdown. Shortly thereafter, it worked as staunch resistance within the aforementioned congestion area and stopped shares of Apple stock in their tracks back in early August.
Bear Put Spread on AAPL Stock
In reviewing the AAPL stock options board, I’m taking into consideration the possibility for a decent-sized retracement, but also dealing with high volatility conditions and still-expensive premiums. To me, the Sep 11 $112/$107 bear put spread — priced at $1.27 with shares of AAPL stock at $113.21 as of Friday’s close — is interesting.
I like the idea of entering on minor weakness in looking to confirm topping action. Using this approach, a price decline of 1% with shares of Apple at $112 used as a signal; the vertical spread should be priced around $1.50.
If a trader were to use a stop-limit order and be willing to pay up to $1.65 (or 15 cents above the estimate at $112 if needed); he or she would have the opportunity to make at least $3.35 profit or a return of 200% at expiration if AAPL stock is at or below $107 at expiration.
To break even on the position, this Apple stock spread will require shares of Apple at $110.35 at expiration or about 1.5% below the described price trigger of $112.
This spread allows a trader to initially remove a good deal of time decay and volatility risk associated with purchasing an outright option and makes it a well-suited alternative position for self-directed swing traders looking to short shares of AAPL.
Lastly, as an insurance policy, it’s nice to know this AAPL stock spread offers defined risk contained to the initial purchase price. But as it is a slightly out-of-the-money and short-term spread, a money stop of 50% might be suggested as a good policy should Apple stock reverse higher.
Investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT.
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