Apple Inc. (NASDAQ:AAPL) is the The Coca-Cola Co (NYSE:KO) of this generation’s investors. Near-term though, and in front of earnings, Apple stock may be a bit overly ripe for owning. Instead, buying into an anticipated corrective pullback using AAPL options and without having to pay a cent is ‘it’ for this strategist. Let me explain.
Personally speaking, it’s hard to build a bear case for AAPL stock. And I won’t. Apple Pay is doing terrific. Apple’s services businesses continue to grow and this year’s iPhone 8 — well, it probably will live up to the hype.
There’s also the realization other initially perceived “bad Trump stocks” such as Amazon.com, Inc. (NASDAQ:AMZN), Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) and Netflix, Inc. (NASDAQ:NFLX) have all scored huge gains from their own post-Donald-Trump corrective jitters. What’s more, those tech giants have all seen even higher all-time-highs in the aftermath of their own earnings reports.
So, Apple stock must be going higher, right!!??
Apple Stock Daily Chart
AAPL has come a long way from its post-election low on Nov. 14 when shares managed to successfully test the 200-day simple moving average and fill a bullish gap from September. In fact, Apple stock captured gains of nearly of 40% in less than five months!
To say the least, it has been an impressive technical run and value-add to both AAPL shareholders and the world’s largest publicly traded company. That’s all the more apparent with Apple registering just one pullback in excess of 2% prior to establishing an early April then-all-time-high of $145.46.
Now though, there are technical signs a more meaningful correction is readying to appear. From the April high to the end of last week, shares of Apple had formed a modest corrective move of 3.7% and smallish double top pattern. More optimistic investors might see the price action as a bullish cup-shaped base. However, with stochastics starting to cross and roll over and a fairly long in-the-tooth bullish narrative supporting Apple, I’d rather look at ways to exploit short-term weakness that may be coming in AAPL.
AAPL Stock Modified Long Put Butterfly Strategy
In anticipating some near-term weakness in Apple stock but liking the name longer-term and not wanting a strategy that will cost money if the short-term outlook is off, a modified long put butterfly is one strategy that makes sense.
After reviewing the Apple options board, the 12 May $139/$137/$133 put butterfly fits this agenda. With AAPL at $143.65, the spread is priced for even money or maybe a credit of 1 to 2 cents.
What does this position offer for the trader? First, if our prognosis for lower prices is flat-out wrong, the spread goes out worthless. But since the position doesn’t cost anything to establish, there’s no loss involved.
Better yet, if Apple stock does work its way into a correction situation, on an expiration basis the trader begins to turn a profit below $139. The real sweet or ‘it’ spot is if at expiration AAPL is trading at $137. That amounts to a price decline of 6.2% from current levels and would maximize the spread’s profit potential of $2.
Should a more meaningful price drop take hold, this modified butterfly maintains a downside break-even of $135 in Apple stock. This works out to a corrective move of 7.5% and lines up fairly well with the prior all-time high of $134.54 from 2015.
The real risk, for some traders at least, is too much downside. Below $133 in Apple stock and the spread is out $2. This is the result of the embedded $137/$133 bull put spread expanding to $4 versus the tighter and profit-generating $139/$137 bear put spread.
The good news is losses are contained. The better news is that would take a fairly large corrective move of nearly 9%. Also, if the AAPL stock trader is truly a longer-term bullish investor, this strategy offers a much less sour-looking starting point for accumulating Apple stock with certain risk control, don’t you agree?
Investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT.
