Apple (AAPL) enjoyed the market at its back during October’s massive rally. But the time is ripe to sink your teeth into a bear put spread in Apple stock.
On a percentage basis, Apple stock has seemingly enjoyed much of the fruits of a broader market rally with a rather strong 8.3% monthly performance.
But when compared to the S&P 500 and Nasdaq — both of which contain Apple as their most influential component — Apple stock has merely matched the S&P’s 8.3% gain and fallen short of the Nasdaq’s 9.4%.
The mixed performance isn’t exactly the legendary technical leadership bullish investors have come to expect from shares of AAPL over the last dozen years or so.
The subpar performance has also kept AAPL stock below its 200-day simple moving average and in “bear territory” according to some trend following definitions. At the same time, the two broader markets have reclaimed their 200-day averages.
The relatively discouraging price action in Apple stock could boil down to earnings and Apple’s future world domination. The latest guidance from Apple calls for anemic sales growth of just 4% for Q4.
But as Apple is known for sandbagging guidance, shouldn’t investors have taken the single-digit forecast with a grain of salt, rallying behind Apple stock? They might have, except the guidance came in the wake of record-breaking results for Q3 and nearly 100% revenue growth in China — despite all the noise over how weak China is supposed to be. So, AAPL gave investors plenty of reasons for concern.
Apple continues to lag by the stated technical metrics. With the broader market extremely overbought after October’s rally, Apple stock is viewed as a favored short due to its inherent and relative weaknesses on the price chart.
Apple Stock Daily Chart
In examining the Apple stock price chart for additional confirmation for shorting AAPL beyond what’s been discussed thus far, a couple of key, albeit unusually calculated resistance lines are in play as bearish resistance.
Shown in the daily price chart of Apple stock, we find shares of AAPL have just finished a two-step or mirror pattern where leg AB = leg CD. The 100% completion is unique because I adjusted the starting point A to the closing price of the August 24 mini flash crash.
Typically, one would begin the two-step pattern calculation on Apple stock from the pivot low on August 24. But the severity and failure of liquidity during the first hour of the mini flash crash essentially limited, if not prevented traders from participating.
My adjustment allows for a more realistic interpretation of where resistance for most traders might lay in Apple stock; the calculation works with more robust levels of supply and demand.
Using the same train of thought, Apple stock is also up against an otherwise elusive 62% retracement level based on a July cycle high to the August 24 close.
The potential resistance from our two Fibonacci inspired price levels is all the more interesting as bearish evidence as they line up rather tightly with Apple’s 200-day simple moving average and AAPL’s Death Cross signal.
With a handful of overhead resistance lines in place and shares of Apple stock rallying in tandem with an overbought broader market; bears have what I see as a better-than-market opportunity for shorting AAPL right now.
Apple Stock Bear Put Spread
The pricing of Apple stock’s options is fairly attractive right now after a substantial pullback and with premiums trading slightly below AAPL stock volatility. But I like the use of a vertical spread due to its ability to further reduce unwanted risks when compared to an outright long put.
In reviewing the options board, the Weeklies November 13 $120/$115 bear put spread for $1.85 is attractive with AAPL trading for $119.50 as of Friday’s close.
This spread trades for nearly 30% less than the $120 put. It also maintains a breakeven of $118.15 and can expand to $5 for a profit of $3.15 in two trading weeks if AAPL is at or below $115.
As this is a short-term vertical, any downside movement in Apple stock towards $115 will be more profitable than if the trader uses a longer-dated vertical with the same strikes.
What’s more, a two-week price decline of 3.7% to get Apple stock down to $115 has historical precedent and doesn’t require the trader to be an alarmist or perma-bear.
In fact, were Apple stock to drop to $115, that’s still above the 38% retracement level from the August 24 close to last week’s high — far from spooky. And given the current overbought market, it’s a promising way for an Apple stock trader to profit with favorable odds.
Disclosure: 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
