BREXIT is now a reality, and most traders will be itching to catch falling knives. I caution against a blind grab in the drawer. Some knives have two-inch handles and 12 inch blades.
Apple Inc. (AAPL) is not one of those.
AAPL stock has already shed most of its froth. It’s down 11% year-to-date and over 25% from its all-time highs. Fundamentally, we are left with a money-making machine that is the envy of most companies.
Critics find fault in its lack of recent innovation. They may be right, and there may be more issues with the very long term AAPL prospects. CEO Tim Cook lacks the vision of Steve Jobs.
But for the next two years, AAPL is will continue to deliver great statistics through to the bottom line.
Click to Enlarge Apple stock valuation is at a level that makes the disaster scenarios mathematically improbable. I do have to be mindful if it loses recent support, we could see heavy technical selling. Regardless, the BREXIT scare presents an opportunity to nibble on stocks like AAPL, where I see a mathematical bottom.
AAPL is one that I have successfully traded several times in the recent months for huge and easy returns. To minimize my exposure, I will revert to the options markets. I will build a decent buffer zone so I don’t have to worry about timing as long as I chose proper levels.
AAPL Stock Trade Idea
The Trade — Long Apple Stock: Sell AAPL Jan $80 put. This is a bullish trade for which I collect $2.62 per contract.
I only sell naked puts if I am willing and able to own AAPL stock at the strike price sold. My breakeven for this trade is $77.38 per share, under which I accrue losses. My theoretical chance of success is 80%. My risk here is being forced to own AAPL stock at a 15% discount from current levels.
The Alternate Trade — A More Conservative Version: Selling naked puts requires margin. Alternatively, I can use a credit put spread to make my risk finite. Sell AAPL Jan $80/$75 credit put spread. This also is a bullish trade for which I collect $1 per contract.
My potential yield here is a respectable 25%, especially when I have an 80% theoretical chance of success. My maximum loss would be the difference between the width of the spread and the premium collected. In this case it’s $4 per contract.
It is important to note the risk involved in selling spreads. The options markets allow for hundreds of ways to implement the same thesis. If a $5-wide spread is too much financial risk, I can switch it to one that is smaller. In this case, I can choose AAPL Jan $82.50/$80 credit put spread which is $2.50 wide. For this I collect 60 cents per contract, which is a mind blowing 32% potential yield.
The sacrifice here is that I lower my theoretical chance of success a little, since the buffer from current price is smaller.
These are longer term-trades, but I am not required to hold them through expiration. I can close any trade at any time for partial gains or losses.
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. You can follow him on Twitter at @racernic and stocktwits at @racernic.