Shares of Apple Inc. (AAPL) seemed to have finally found some significant support after underperforming the overall market for the past few weeks.
Click to Enlarge Apple stock currently has support at $105. Meanwhile, 14-day RSI also curled higher, after reaching a deeply oversold reading below 30. The downtrend in AAPL was broken as well, with Apple’s stock price breaking past the $107.20 level.
On a fundamental basis, Apple stock is getting attractive on both dividend and valuation bases. AAPL currently yields nearly 2% (compared to 2.24% for a 10-year Treasury). Meanwhile, Apple shares are trading at a significant discount to the S&P 500 on a price-to-earnings basis, with an 11.75 P/E compared to the S&P 500 P/E of 19. Given that Apple is the largest component of the S&P 500 by market cap, this makes the relative valuation differential even greater if you break out AAPL.
Using the Nasdaq OMX Alpha AAPL vs. SPY Index (AVSPY), which compares AAPL performance to the S&P 500, one can see that Apple stock also bounced off comparative support at the $26.25 level.
While I am not looking for an explosive upside out of AAPL, I also think the recent price action in Apple stock — as well as the cheap valuation and decent dividend yield — points to a short-term bottom in Apple stock.
Given that the overall market is also entering into a normally seasonal bullish seven-day period, I think selling an out-of-the money put spread in AAPL makes sense at current levels.
Specifically, I would look to sell the AAPL Jan $104 put and buy the AAPL Jan $101 put for a 46-cent net credit. This positions the short strike 3.73% below the closing price of $108.03 and also below the $105 support level on AAPL.
The short put spread trade has a maximum gain of $46 per spread, with a maximum risk of $254 per spread. Return on risk is 18.11%.
I would use a meaningful break below the $105 support level on AAPL as a stop-out level, while letting the spread expire worthless to realize the maximum gain if the support level holds.
As of this writing, Tim Biggam did not hold a position in any of the aforementioned securities. Anyone interested in finding out more about option-based strategies or for a free trial of the Delta Desk Research Report can email Tim at firstname.lastname@example.org.