Tech stocks had been on fire since late March, especially mega caps. But that ended last week. On June 9, we saw an emphatic rejection in the Nasdaq leaders. Even tech stocks like Amazon.com, Inc. (NASDAQ:AMZN), for example, were hit, with AMZN dipping to the $920s!
The collective known as FANG also fell 6% on the same day. Even the mighty Apple Inc. (NASDAQ:AAPL) fell 8% in two days. It was an event that deserved respect. This dip served as a one-month reset in price appreciation.
Trader temptation is often to chase performance in either direction. Bulls tend to want to buy high and conversely there is the lure of the shorts to chase dips after they occur. So I am sure that now that these stocks have corrected, more bears will chase the downside and likely be too late.
Today, I want to trade three currently popular stocks to short. Instinctively, these three would not be what I personally would short. I wouldn’t want to bet against three of the strongest stocks in the markets. I would rather pick on ones that are limping.
I will not do battle with the bears in open fields. Instead I will use options where I can control my starting odds of success. The goal in all three trades is to generate income from scenarios that I deem unlikely to occur.
Mega-Cap Tech Stocks: Apple (AAPL)
Click to Enlarge Apple Inc. bears criticize AAPL stock for being an iPhone company. We should be all so lucky to have that problem. So while this could be a long-term issue, AAPL is as solid a company as they come in the here and now.
Betting against the worst-case scenario would not be a good idea in my book. So I will generate income from selling against what other traders fear.
Sell AAPL Nov $115 puts and collect $1 to open. Here I have a 90% theoretical chance to retain my maximum gains. But if price falls below my strike, I would own the shares and suffer losses below $114. I only sell naked puts because I am willing and able to own Apple stock if it falls 20% from its current price.
I could sell the AAPL Nov $120/$115 credit put spreads instead, which carries more limited risk, yet still could yield 10%. Compare this with risking $146 per share to buy AAPL stock at face value (and without a buffer), then needing it to rally 10% just to match the performance of this spread.
Mega-Cap Tech Stocks: Alibaba (BABA)
Click to Enlarge On June 7, Alibaba Group Holding Ltd (NYSE:BABA) stock spiked 14% on news from management of better things to come. The move was so emphatic implying that there has been a change in the game. Yet, I bet that the bears will dig in their heels even more.
This spike came after a 20% three-month rally as it was. So now BABA stock would likely appear even more “short-a-licious” to the bears.
Alibaba stock is not cheap, but the premium is justified by its growth record. Its e-commerce business nurtures its foray into other arenas, including media and the cloud. So bulls have a legitimate reason to favor BABA stock. I do worry about lofty expectations, however, so this trade must room for error.
Sell BABA Sept $110 puts and collect $1 to open. This give me a 90% theoretical chance of winning. If price falls below my strike, however, I would own Alibaba stock and accrue losses below $109. I never sell naked puts unless I am willing and able to own BABA stock. So if I don’t want to own the shares on a 20% dip, I should use a bull put spread instead.
That is, sell BABA $115/$110 credit put spreads. This has a limited-risk profile. If successful, it would yield 13%. So I don’t need to buy the shares at face value and then hope it rallies 13%.
Mega-Cap Tech Stocks: Tesla (TSLA)
Click to Enlarge I have been a long-time critic of Tesla Inc (NASDAQ:TSLA) stock. I loved the cars, but thought TSLA stock was careening for a horrific crash. I’ve since changed my mind. While I am still a skeptic of Tesla, I trade it like a startup with several potential cash cows in the making.
I can definitely understand why TSLA bears want to bet against it, but I think they are fighting a losing battle. The Tesla story is longer-dated, so it will take years to be proven wrong. Meanwhile, shorting it in my opinion is hazardous.
But since there is big money betting against the stock, I will sell downside risk to generate income. I do have to worry about the fact that, of today’s three tickers, Tesla is the most frothy. Sell TSLA Sept $230 puts for $1.50 to open. I have a 90% theoretical chance to keep my maximum premium. If price falls below 230, I would need to buy the shares. I would consequently suffer losses below $228.50. Selling puts is risky, but here TSLA would have to fall 40% for my trade to really sour on me.
If selling naked puts isn’t your thing, you can use spreads instead — TSLA Sept $270/$265 bull put spread. This has a finite-risk profile. If successful, it would yield 10%.
It should go without saying that selling options is risky business, so only risk what you can afford to lose.
Learn how to generate income from options 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.