Under a month ago, I wrote about how it wasn’t too late to create free profits from Apple Inc. (NASDAQ:AAPL) stock. The trade yielded almost $5 in pure profits. I gained $3 from my debit call spread appreciation and $2 from selling the naked put.
Now Apple stock sits near its all-time highs making it difficult to recommend an entry point. Furthermore, other mega-caps like Amazon.com, Inc. (NASDAQ:AMZN), Facebook Inc (NASDAQ:FB) or Alphabet Inc (NASDAQ:GOOG,NASDAQ:GOOGL) have more obvious entry points.
So is it too late to set another long trade in AAPL? I don’t think so; there is still time to set another trade using options for another potential run of free profits.
Fundamentally, Apple stock still is a money printing machine with a rosy intermediate outlook. I have my concerns about its leadership though; I strongly believe that Tim Cook will ruin Apple, but not in the next few months. Meanwhile, and if markets in general don’t suffer a sustained correction this year, AAPL should be higher through 2017.
Click to Enlarge Technically, AAPL has a few constructive points. First, it made a wide rounding bottom rejecting the last swoon.
Also, I think that if Apple stock sets a new high it would invite more frantic buyers who were leery of the potential of another double top.
The Trade: Buy the AAPL April debit $135/$140 call spread. This is a bullish trade for which I pay $1.40 per contract to open. If Apple rallies well past my spread, I stand to triple my money. The price I pay to open the trade is the maximum I could lose. Usually I like to lower my exposure. In this case, I want to sell downside risk premium to finance the purchase of my calls or more. It’s difficult to do so near all-time-high levels, but not impossible.
The Bank: Sell the AAPL Jan 2018 $105 put. This also is a bullish trade for which I collect $3 per contract to open. By selling naked puts I am committing to buying the stock at the strike sold if Apple stock falls below it. But even if that bad scenario unfolds, I would have bought the stock at a 20% discount from today’s levels. This trade has a 90% theoretical chance of success.
As long as AAPL stock stays above my put sold, any premium I collect from selling my debit call spread can be pure profit. So if price action becomes too bearish, I could sell back the debit call spread for a profit even if the price I get is lower than my entry price.
I am not required to hold my trades through their expiration dates. I can close either 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.