This year will go down as pretty disappointing for many U.S. equity bulls — including investors in Apple Inc. (AAPL). Shares of AAPL stock are down 3% year-to-date and look to finish 2015 with their first loss in six years.
The pain has come all year. Recently, bulls failed to capitalize on yet another breakout opportunity, keeping Apple stock an underperformer compared to the likes of other mega caps such as Alphabet Inc (GOOG, GOOGL).
I am a fundamental trader, so I only invest based on a solid thesis. This allows me to manage my risk with conviction. Fundamentally, I believe in AAPL’s impeccable balance sheet and mid-term P&L strength. I see no serious risk to its customer base or its margins.
Click to Enlarge Technically, AAPL stock is vulnerable to more downside, but fundamentally few can argue that its prospects are at the upper end of the echelon.
Even in the event that Apple stock falls significantly further from here, I believe it will likely find buyers to support the Apple stock price.
I have a strategy that I used several times in 2015, and that I want to repeat to capitalize on this drop in AAPL stock.
Here’s how to go long AAPL heading into 2016 — and do so for free.
Buy AAPL Stock for a Song
To make the trade at no out-of-pocket cost, I need to deploy my strategy in two separate parts:
- Part 1: I sell the AAPL Mar 2016 $90 put for $1.04 credit.
- Part 2: I buy the AAPL Mar 2016 $120 call for a 96-cent debit.
Overall, this strategy cost me nothing to enter and sets me long Apple through March 2016. Selling the puts opens up the risk that between now and mid-March, I could be forced to buy Apple at $90 per share even if it falls lower than that. This risk is inherent to selling naked puts.
I could modify Part 1 of this strategy to limit the downside risk and better fit smaller accounts. Instead of selling naked puts, I sell the Mar 2016 $90/$85 credit put spread and collect 40 cents per contract.
I specifically chose levels that would have survived even during the August 2015 flash crash. Fed funds rate decisions could be coming around March 2016 and will add risk of to all trades, so caution is warranted.
For Apple stock to fall under $90 per share, markets in general would need to be in correction territory from these levels. I don’t see any current Apple-centric fundamental issues that would cause it to correct alone while markets thrive, which makes this trade awfully appealing.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities.
