Apple Inc. (NASDAQ:AAPL), like many other mega-cap stocks, is within about 1% of its all-time high-water mark. The PowerShares QQQ Trust, Series 1 (ETF) (NASDAQ:QQQ) is within 1% of its all-time high, too, so it’s normal to feel a little edgy about chasing prices higher from here. But based on their fundamentals, valuations still make sense for mega tech like AAPL stock and Facebook Inc (NASDAQ:FB).
Fundamentally, Apple stock still has a lot of momentum left by the iPhone that Steve Jobs created. I remain an outspoken critic of Tim Cook, who I think will eventually break the company. But that danger is a few years away.
AAPL stock has long been undervalued given its fan base and financial health. FB stock is powered by excellent management and more than a billion users in the hottest trends. For the long-term, I simply can’t short concepts like these.
But not shorting is totally different than chasing upside potential.
While I still like Apple’s story for the long-term, I want to take a bearish position in AAPL stock for the near-term. This isn’t “dissing” the company’s prospects. It’s just respecting price levels.
Today’s trade, in fact, is a pure bet against price action rather than fundamentals. So before you send out for my arrest, read my recent writeup about going long AAPL for free. The trade yielded free, substantial profits.
Today, I’m going to use options to set up a pair trade.
How to Trade AAPL Stock Here
The bet: Buy the AAPL Apr $135 put for $1.4 per contract. This is a bearish trade where the maximum risk is the cost of entry. The faster Apple stock falls toward my put the faster my profits accrue. For a more conservative approach I can turn this into a debit put spread instead.
To reduce my out-of-pocket expense I will leverage AAPL’s fundamentals. I will sell longer-dated downside risk against levels that I know Apple stock won’t visit. The purpose is to generate potential income out of thin air to finance my bearish bet.
The bank: Sell the AAPL Nov $110 put for $2 per contract. Given the 20% buffer from current price, this trade has a 90% theoretical chance of success. For a more conservative approach, I can turn this into a credit put spread instead.
Taking both trades means I am getting paid to short AAPL stock. I will profit even if Apple goes nowhere. I will net 60 cents per contract if both options expire worthless. So, as long as price stays above my sold put, any premium I recapture from selling my bearish trade is pure profit.
I am not obliged to hold my options trades open through their expiration.
Selling naked puts is dangerous, so only do it if you’re willing to own AAPL stock at that price. And never risk more than you can afford to lose.
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.