Shares of Apple Inc. (NASDAQ:AAPL) are finally starting to cool down a little in front of the highly anticipated Sept. 12 event. Certainly, the hype surrounding the event is responsible for a fair part of the recent rally. Considering the magnitude of the move over the past few weeks, I look for AAPL stock to trade sideways this week and consolidate before the big presentation next Tuesday.
Rumors surrounding announcements at the event are centered on a new anniversary edition iPhone 8, Apple Watch and HomePod and Siri. No major design upgrades to the existing 7 series are expected to be in the works. Also, iPads and Macs are not expected to be part of the event. So while certainly not inconsequential, the event looks to fall short on the fireworks needed to sustain the recent rally.
The price action in AAPL stock is also showing signs that the fireworks may be over as well. After rallying for six straight days and eight out of the last nine, AAPL is getting overbought readings that have been indicative of a top in the past.
Apple stock is now at an extreme reading over 81 on a five-day RSI basis, with reading exceeding 80 shown to be reliable indicators of impending consolidation periods over the prior six months.
After trading down to support at $155 on Aug. 21, AAPL stock has risen 9% over the past nine trading days to a new all-time high. This may likely be a case of too far, too fast for Apple stock.
Friday’s price action, with Apple trading up to $164.94 intra-day before reversing to close barely positive at $164.05, is a sign that shares may be looking a little exhausted at these levels.
Click to Enlarge Fundamentally, AAPL is also trading at an extreme. Apple now sports the highest P/E ratio over the past five years at 18.60. This compares to a five-year average P/E of just 13.73 for Apple stock.
The last time AAPL traded at a P/E over 18 was November 2014, which marked a major top in AAPL stock.
With the Sept. 12 event looming, implied volatility (IV) in Apple options is high, meaning options are comparatively expensive. This makes option selling strategies more attractive.
So to position for a week of consolidation in front of the big Apple event next Tuesday, a short-term call spread makes intuitive sense.
AAPL Stock Options
Buy AAPL 8 Sept $167.50 calls and sell AAPL 8 Sept $165 calls for a 55 cents net credit.
Maximum gain on the trade is $55 per spread with a maximum risk of $195 per spread. Return on risk is 28.20%. The short $165 strike is positioned just above the all-time intraday high of $164.94.
The Sept. 8 expiration date means the trade will expire before next week’s Apple Event on Sept. 12.
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.
