Wednesday we saw a bloodbath in the mega-tech stocks. The Nasdaq PowerShares QQQ Trust, Series 1 (ETF) (NASDAQ:QQQ) fell 1.7%. The selling was not market-wide since the Dow Jones Industrial Average and the small caps rose 0.4%. There was deliberate selling of the FANG gang. As a collective, they fell 2.8%. This includes Facebook Inc (NASDAQ:FB), Amazon.com, Inc. (NASDAQ:AMZN), Netflix Inc. (NASDAQ:NFLX), and Alphabet Inc. (NASDAQ:GOOG, NASDAQ:GOOGL).
Apple Inc. (NASDAQ:AAPL) didn’t escape the bears. It fell 2%, but it was twice as bad mid-day Wednesday. While it still is close to its all-time high, I believe it’s a short-term bullish opportunity. Why? Because I don’t believe the bears will break this bullishness in the market, so AAPL stock will recover.
How to Play the Moves in AAPL Stock
In addition to the general high-tech drubbing, AAPL had its own reason to sell. There was a headline of a glitch in the password in its iOS. As usual, I expect them to patch it up soon enough and traders will forget all about the glitch in the all-mighty operating system.
Since I think this is a temporary problem, I will set a short-term bullish trade in AAPL stock. I come into this with profits in hand since I was able to scalp some intraday profits on the mid-day bounce.
Fundamentally, I can easily argue for bargain levels in AAPL stock, even near its all-time highs. It still sells under 20 price-to-earnings and 6 times price-to-book. This is very cheap considering it’s the largest public company with a golden balance sheet. My only complaint about it is its CEO. I think the company would have done just as well without one.
It’s a money making machine on rails.
Technically, a 2% dip on Wednesday felt like doomsday. Yet, AAPL stock is still up 46% in 11 months.
From that perspective, it could be vulnerable for more downside. However, if my macro assumptions are valid, then the bulls are still in control and there is no way they don’t step up to buy Apple stock lower.
Besides, as the AAPL stock falls, I am confident that famed investor Warren Buffet will add to his position in droves. Management will also buy its own shares back; they have become financial engineers extraordinaire.
The Bet: Sell AAPL Dec $160 put and collect 60-cents-per-contract to open. Here, I have a 85% theoretical chances that price will stay above my level. Otherwise, I will accrue losses below $159.40.
Those who want to mitigate the risk that comes with selling naked puts can sell spreads instead.
The Alternate Bet: Sell the AAPL Dec $162.50/$160 bull put spread which has about the same odds of winning and would yield 14% on risk. Compare this with risking $169-per-share here and without any room for error expect a rally profit.
It is important to note that today’s trade doesn’t need a rally to profit. I simply need Apple stock to hold above recent lows for two more weeks. Time will then do the heavy lifting and premiums will expire in my favor. But in case I am wrong, I have to be ready to own the shares at that level.
Ultimately, I never risk more than I am willing to lose because regardless of how careful I am, investing in stocks is fraught with danger.
Get my newsletter for free 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.
