Over the past two days, Apple Inc. (NASDAQ:AAPL) has experienced a mini-crash. AAPL stock has fallen almost 9% in just two candles, pricing out almost two months’ worth of bullish progress.
Last week, we saw Apple announce its entry into smart speakers with the “HomePod.” So they are trying to shed the stigma of being an iPhone company.
The proof is in the pudding, but those results will take time. Apple is now in direct competition with Amazon.com, Inc.’s (NASDAQ:AMZN) Echo and Alphabet Inc’s (NASDAQ:GOOGL) Google Home smart speakers, and those two companies have a head start.
Still, I like going long AAPL stock on dips.
But instead of buying Apple shares in the open market, I prefer selling downside put risk to generate income. The trick is to find support levels that will hold.
This dip is legitimate from the sense that it happened on volume. So I ought to respect it. Usually I do that by not betting on a bounce that is too short-term. But in the right hands, the short-term can bring fast profits.
My thesis is that eventually, Apple stock will find footing because buyers will step in. There are institutional buyers that had missed the spike so they are likely to take the redo opportunity that presents itself here. Furthermore, big money who believe in the long term will add to their positions none more famous than Mr. Warren Buffett. He is likely to add AAPL to his Berkshire Hathaway Inc. (NYSE:BRK.A, NYSE:BRK.B) holdings on big dips such as we see now.
How to Trade AAPL Stock
The bet: Sell the Jun $141 put and collect 90 cents to open. Here, we have an 80% theoretical chance to retain our maximum gains. But if price falls below our strike, then we will own the shares and suffer losses below $140.10.
Selling naked puts is risky and not suited for many investors. For those, I would change the trade into a credit put spread to limit the risk.
The alternate: Sell the Jun $141/$140 credit put spread, where we have the same chance of success. Risk is limited, but it still leaves the opportunity to yield 25%. Of course, you could always try to buy AAPL stock in the open market and hope they rally 25% just to match the performance of the spread. It’s up to you.
These are short-term trades, so they carry risk. Only engage with them if you’re willing and able to manage their risk and take the loss. Otherwise, you should step out further in time so you can build a bigger buffer from current prices.
Selling puts is dangerous business, so only risk money 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.
