I often mention that shorting a strong stock is hard to do. However, when a Wall Street darling falls out of favor on weaker fundamentals and the technical picture starts to follow suit, it gets me excited.
Most of the suits and ties will tell you not to “trade” Apple Inc. (AAPL). Instead, they will tell you to hold the stock for years.
Perhaps the dividend is being taken into consideration, but Apple is currently only paying $2.28 a year for a dividend yield of 2.45%. The company could certainly pay more, but it is still hoarding cash while making subtle acquisitions.
Apple’s most recent quarter in April was a disaster across the board, and the company reported a 10-cent earnings miss. Revenues of $50.6 billion also fell shy of forecasts for a reading of just under $52 billion.
The company also lowered its current-quarter revenue guidance to between $41 and $43 billion versus estimates for $47.4 billion. Gross margins between 37.5% and 38% are still impressive, but Apple needs growth in new areas to offset declines in others.
I mentioned above that the technical outlook for Apple was looking weak, as all of the major moving averages are in a downtrend. The two-year chart also shows that a break below $92 to $91.50 would be a bearish development, and there is the possibility that the mid-$80 range could come into play.
While there is a good chance that shares could rally back to somewhere between $94 to $96, the $98 level represents a much tougher hurdle, as it marks the “gap down” from previous support near $105. Analysts have been giddy on the pullback from the 52-week high just south of $133, as they are still recommending the stock.
On Monday, RBC Capital said that Apple was oversold and that the company’s gross margins are “poised” to increase. I’m not sure if they read the fine print, but I just mentioned that Apple’s gross margins would come in around 38% for the current quarter. RBC kept its “outperform” rating and $120 price target on the stock.
Another brokerage firm kept its “outperform” rating on the stock as well, even though it said that Apple’s share-buybacks were below average in March.
2 Ways to Play Apple Stock Options
I would like to see Apple trade a little higher over the next week or two to see if resistance levels hold. If so, put options will become cheaper, and I’ve listed the ones I’m targeting below. I could also use these options if Apple shares have peaked and a move below $91.50 comes over the near term.
The AAPL June $90 puts (AAPL160617P00090000, $1.50, up 16 cents) are my first choice to play a breakdown on a move below $91.50. These options have over a month of time premium to allow a potential trade to play out. If shares fall below $87.20, technically, by mid-June, these options would just about double from current levels.
The AAPL July $87.50 puts (AAPL160715P00087500, $1.59, up 12 cents) would give the potential trade over two months to play out. These options would nearly double from current levels if shares are below $84.50, technically, by mid-July.
I am currently sitting on the sidelines with the aforementioned AAPL options, but I will continue to watch Apple and look for a great entry price to possibly go “short” by using put options.
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