After a post-earnings rally that propelled Apple Inc. (NASDAQ:AAPL) to new all-time highs at $162.51, AAPL stock has fallen back sharply over the past four trading sessions. Apple is now perched just above crucial support at the $155 level. Given that the Apple bears have tried and failed on three separate occasions to break through this key price, I look for AAPL stock to hold this important juncture over the coming few weeks.
Most of the upcoming news surrounding Apple will likely focus on the impending iPhone 8 release, which is always fraught with conjecture by analysts and techies alike. The release date alone has been a hot topic, with expectations for either a likely Sept. 6 or Sept. 13 launch event being perhaps delayed by integration issues.
As a trader, however, I like to focus on facts rather than conjecture.
Technical analysis is the best way to examine the facts about what the market thinks about AAPL stock in a straightforward manner. In my previous article on Apple, I thought that Apple stock was looking exhausted at the $161 level which proved to be the case. In a somewhat similar fashion, I think the selling in AAPL stock appears to look exhausted now as well.
Click to Enlarge As the chart shows, AAPL stock bounced convincingly off the $155 level on Aug. 3, again on Aug. 10, and once again yesterday. The price action evident yesterday was also indicative of a reversal day, as Apple traded all the way down to $155.11 before reversing to close nearly unchanged at $157.21.
Add in the fact that AAPL closed above the widely followed 20-day moving average of $156.09 and it certainly supports the notion that a short term low may likely be in place for Apple.
From a fundamental viewpoint, the recent 3% pullback in Apple stock has made valuations more compelling, especially given that both the latest earnings and revenues beat estimates handily. The price-to-earnings ratio for AAPL now is below 18 again and also at a major discount to the current S&P 500 multiple of 24.21. Lest we forget, the company now has a staggering cash hoard of $261.5 billion.
The options market is showing a fair amount of concern regarding AAPL stock with implied volatility (IV) now residing at 78% even post earnings. Heightened levels of IV tend to be a reliable contrarian indicator of a low in AAPL stock. High levels of IV also mean option prices are comparatively expensive, favoring selling strategies.
So to position for the $155 support level to hold in Apple, a bull put spread makes intuitive sense.
AAPL Stock Trade Idea
Buy AAPL Sep $150 puts and sell AAPL Sep $152.50 puts for a 55-cent net credit
Maximum gain is $55 per spread with maximum risk of $195 per spread. Return on risk is 28%. The short $152.50 strike price is well below the $155 support level and provides a 3% downside cushion to the $157.21 closing price of AAPL stock.
As of this writing, Tim Biggam did not hold a position in any of the aforementioned securities. Anyone interested in finding out more about option-based strategies or for a free trial of the Delta Desk Research Report can email Tim at timbiggam@gmail.com.
