A sweet tune of late is changing for Apple Inc. (NASDAQ:AAPL). But for AAPL stock investors, preparing to buy bruised shares using Apple’s options markets makes both ample sense and lots of cents at the same time. Let me explain.
Tech is taking it on the chin for a second straight session following Friday’s less-than-comforting bout of collective profit-taking or algo-driven market theatrics. And far from immune, investors are starting to sour on AAPL stock.
Aside from the macro elements of why Apple and other mega-cap tech stocks like Amazon.com, Inc. (NASDAQ:AMZN) or Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) are coming under pressure, AAPL stock has been hit with back-to-back downgrades by analysts over the last week.
Following a cut to neutral and $145 price target by Pacific Crest, analysts at Mizuho Securities downgraded Apple shares over the weekend. Both firms appear to be using the same recipe book, stating investor optimism over the upcoming iPhone 8 rollout has been baked into AAPL stock.
The good news, particularly if you’re inclined to believe in the long game for Apple, is that a bruised AAPL stock is starting to look a good deal healthier on the price chart.
Apple Weekly Chart
Less than two weeks ago, I warned that while history may not repeat, it does rhyme often enough. The caution was aimed specifically at AAPL stock’s weekly chart. In our view, similar pattern and price symmetry appeared to set up shares for a corrective move — one which is now underway.
Thus far, shares of Apple have pulled back 8% from its recent high of $156.65. The decline is a healthy and fairly normal corrective move for a stock of Apple’s size. Having said that, a correction of 10% to 15% wouldn’t be uncommon and in this instance, would still maintain the integrity of the weekly uptrend.
AAPL Stock Modified Long Put Butterfly Strategy
In anticipating Apple could correct as deep as 10% to 15% and still be considered a healthy pullback worth buying, a modified put butterfly spread is one way to position.
With AAPL stock at $144.70, the Weeklys 7 July $140/$138/$133 put butterfly is priced for a credit of 20 cents and fits in nicely with this outlook. How so, you ask?
First, if Apple fails to move into the spread’s range from $133 to $140, the put spread goes out worthless and the credit is captured.
If AAPL stock does move into price area defined by the butterfly, profits accrue dollar-for-dollar from $140 down to $138 with a max gain of $2.20 at expiration in the event shares land squarely on the short $138 puts.
Below $138 and the position begins to give back its profit as the spread’s embedded $138/$133 bull put vertical gains value at the detriment of the higher in-the-money $140/$138 bear put spread. The offset results in a breakeven price of $135.80, which is fairly deep inside the anticipated correction area.
Below $133 and the spread is out $2.80. This is the result of the embedded bull put spread expanding to $5 versus the tighter and profit-generating $2 bear put spread and factoring in the credit.
The good news is losses are contained and it would take a corrective move of 15% to generate what amounts to a loss of about 2% of AAPL stock’s current price. What’s more, if the AAPL trader is truly a longer-term bullish investor, the spread does offer a nice risk-controlled means to begin accumulating Apple at bruised, but much healthier-looking, prices.
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.
