The indiscriminate selling from 2015 barreled through to the New Year, giving the bulls a rough go of it in the first two months of 2016.
Industry stalwart Apple Inc. (AAPL) is currently down 28% from its 2015 highs, so the AAPL’s 2016 lows present an exceptionally attractive opportunity. Especially since the bulls have not yet bought into Apple stock.
On Tuesday, Apple announced a $12 billion buyback program, which presents a floor in Apple stock. The buyback program makes shorting AAPL more difficult. Anyone who was considering going short AAPL likely won’t want to fight an uphill battle against Apple’s buybacks, so they would avoid shorting AAPL stock. This makes the downside trajectory harder than the upside.
As a fundamental trader, I believe in Apple’s balance sheet. Its earning capability remains undiminished, yet, I still worry about how far markets will be willing to take the Apple stock price from here.
Even though AAPL, on a technical basis, is still vulnerable to more downside in the event of another market correction, I’m confident Apple will step in and aggressively defend its stock price.
2 Trades for Apple Stock
I rarely like to sell naked puts, but given this special circumstance, I want to use this strategy to profit from a long AAPL options strategy. I especially like this strategy because of its minimal risk.
Click to Enlarge What’s more, there’s no out-of-pocket expense to open this trade, of which I will proffer up two flavors:
Option 1:
Sell the AAPL Jan 2017 $75 put. For this I collect $4 credit per contract. This has an 80% theoretical chance of success. The absolute yield if successful is 6%. The yield on current margin requirement is over 30%. Losses will come if Apple falls below $71 per share.
Option 2: Sell the AAPL Jun 2016 $80 put for $1.80 credit per contract. This has an 85% theoretical chance of success. Absolute yield of 2%. The yield on current margin requirement is the same as the other trade. My breakeven price is $78.20 per share.
Overall, this strategy cost me nothing to enter and sets me up to profit even if Apple stock goes nowhere for months. To be successful in both trades, I need AAPL to stay above $80 for the next 122 days and above $75 per share for the rest of the 2016.
The worst case scenario isn’t even that scary, so long as I’m willing to own Apple stock at a 22% discount from current levels. If Apple falls lower than my strike prices, I would be forced to keep my word to buy Apple stock at that price — an inherent risk to selling naked puts.
I could modify this strategy by buying a few calls to benefit from a run up in AAPL stock. But I am less convinced that AAPL will rally than I am of its floor.
More aggressive traders could step up higher than my strike prices for more premium. But I would rather make room for potential silly U.S. Federal Reserve actions with regard to rate hikes in 2016.
For Apple stock to fall under $80 or $75 per share, markets in general would need to be in dire straits. I don’t see any current fundamental AAPL issues that would cause it to correct alone.
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.
