In this uber-bullish equity environment, the long trade has been the easier bet. I’ve recently shared a winning Apple Inc. (NASDAQ:AAPL) trade that was supposed to be a slow-mover, but Apple stock delivered us fast profits.
Even though some experts still deny the Trump trade exists, it’s in full effect. Every dip is being bought. Equity markets have no fear. Shorting stocks has been a tricky proposition, but it’s not impossible to do.
In this animal-spirited market, you should limit your short exposure. But because it’s necessary to have balance in any portfolio, I suggest finding and holding cautious bearish positions.
You can achieve this via the options markets.
Click to Enlarge I look for overextended temporary price positions and bet on a pullback. With AAPL near all-time highs, I could easily see it dipping into its May 2 earnings report.
This isn’t a bet against Apple’s fundamentals. In fact, I believe Apple stock is well-supported by solid metrics for the next few years. But a shallow pullback off an earnings report is not out of the question.
In my pair trade today, I will leverage AAPL’s value so my bet will carry virtually no out-of-pocket expense.
How to Trade Apple Stock
The Trade: Buy the AAPL May $140/$135 debit put spread for $1.25 per contract. This is a bearish bet that would triple my money if Apple shares fall through my spread in the next few weeks. As noted, I’ll eliminate my out-of-pocket exposure by selling downside risk below proven support.
The Bank: Sell the AAPL Dec $110 naked put for $1.50 per contract. This leg has a 90% theoretical chance of expiring for maximum gains, thereby rending my entry into the bearish bet free. If that happens, any premium I recover from selling the May debit put spread would be pure profits.
Selling naked puts is risky. Here, we would be put the stock at $110 per share if AAPL’s price falls below there.
Me? I’m prepared to own Apple stock at a 23% discount from current levels.
Learn options as easy as 1-2-3 here. 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.