The equity markets fell on geopolitical fears Tuesday, and after just one red day, experts were already talking about market tops. That has me excited to sell risk into Apple Inc. (NASDAQ:AAPL) to prove them wrong and profit from their fears.
Apple is a company on rails. Steve Jobs left an awesome company behind which remains a money making machine that is the envy of all other corporations. However, I remain critical of Tim Cook’s efforts, and I bet that if he doesn’t change his ways, AAPL stock will be looking at its best days through the rear-view mirror.
Before you send out for my arrest for saying this, in today’s trade I will take a bullish position in Apple stock. While I think Tim Cook is not the right leader, I do think Apple shares still have legs, and should hold up well in this uber-bullish equity market.
Fundamentally, AAPL trades at 18 times trailing earnings. Compare this to the 240 P/E of Amazon.com, Inc. (NASDAQ:AMZN). Even Alphabet Inc (NASDAQ:GOOGL) has a P/E almost twice as expensive. So the idea that Apple might fall on valuation alone is unlikely.
Therein lies my opportunity to create income out of thin air.
While I said I would be going long AAPL stock today, I won’t be buying the shares and merely hoping they rally — especially as we approach the product launch event. Apple investors typically sell the news. Instead, I will bet that 2017’s proven support will continue to hold through year-end.
Click to Enlarge Technically, Apple rallied 6% off a triple bottom on Aug. 21 and set an new all-time-high. So the small dip on geopolitical fears is not an indication that the rally is over. Even then, my trade setup doesn’t require incremental upside to profit. I just have to choose levels that are unlikely to occur.
Pivotal to my strategy is that I am willing and able to own Apple shares at a discount. Since I sell puts for income, I commit to owning the stock if Apple’s price falls below my strikes.
How to Trade AAPL Stock
The trade: Sell the Feb 2018 $120 put and collect $1 per contract. This is a bullish trade that gives me an 85% theoretical of success. However, if Apple’s price goes against me, I would start to accrue losses below $119.
Those who need to mitigate the risk of selling naked puts can use spreads instead. There, the risk is limited by the width of the spreads that they sell.
The alternate trade: Sell the Feb 2018 $125/$120 bull put spread, which would yield 8% on risk if it wins.
In either of my setups, AAPL stock would need to fall more than 22% for me to lose. Compare this with risking $162 now to buy the shares when markets are near all-time highs, and with so much uncertainty brewing.
Since there are no guarantees when investing in the stock markets, I never bet more than I am willing 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 as @racernic on twitter and stocktwits.
