Apple Inc. (AAPL) has been brought down to earth, humbling shareholders with a 20%-plus haircut that serves as a reminder even the king of the world has to suffer through the occasional bear market.
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The selling in Apple stock reached max velocity following its Tuesday evening earnings announcement.
The high volume swoon returned shares to a pivotal level — the August crash lows.
Such a retest represents a low-risk entry if there ever was one. If the support level fails, buyers can make a swift exit incurring little loss for their venture.
On the flipside, if the lows hold and AAPL rises from the abyss, profits aplenty are in the offing. That’s what we call an asymmetric risk-reward ratio.
Some have argued that the drop in price has made Apple stock a veritable bargain. I agree. So the question circling the minds of clever shoppers is how to structure a trade to exploit the sale. While you could always cut to the chase and buy shares immediately, other alternatives are worth consideration.
Sell Apple Stock Puts for Cash
For example, how would you like to get paid for promising you’ll buy shares of AAPL? If you want to buy them, you might as well get paid to do so. Such is the opportunity that awaits for those willing to sell put options.
When you sell to open a put option you essentially obligate yourself to buy shares at a set price. In exchange for bringing on the obligation you are compensated with cold, hard cash. Right now someone will pay you about $200 if you promise to buy 100 shares of Apple stock at $90. The promise expires at March expiration.
If AAPL stock is north of $90 at that point, the option simply expires worthless and you keep the $200. If Apple stock is below $90 you’ll have to make good on your promise and buy the shares — which you wanted to do anyways, right?
And here’s the bonus. You get to keep the $200 either way. So really, if you end up buying 100 shares, your cost basis isn’t $90 per share, it’s actually $88. That’s about an 8% discount to the already discounted share price for AAPL. Sounds like a win-win, no?
The trade we’re highlighting is selling to open the March $90 put for $2. The reward is capped at the $200, while the risk is simply that you have to buy shares at a cost basis of $88 should Apple stock sit below $90 at expiration.
Now you understand why put selling is such an attractive proposition for investors looking to buy stock. Consider it a savvier method for participating in the occasional fire sales that crop up in healthy stocks like AAPL.
As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.
