The selling pressure weighing on small-caps finally came home to roost for tech stocks yesterday. Look no further than Apple Inc. (NASDAQ:AAPL) for proof. AAPL stock opened lower and continued sliding throughout the day, closing near its lows. But I think the dip screams opportunity.
For starters, AAPL stock and the rest of the FANG gang experienced huge rallies during earnings season. Coming into November, the mighty fruit was pushing well into overbought territory, in desperate need of a breather.
And that means this week’s pullback was well-timed and entirely rational. AAPL has now returned to a potential support level in the form of the 20-day moving average. Also, yesterday’s drop officially filled the earnings gap.
And as any good technician will tell you, gaps, once-filled, it often becomes support. Even if Apple shares experience a deeper retracement, support aplenty looms below suggesting this will be a buyable dip versus a trend ending downdraft.
If the sell-off does turn nasty, a break of $160 is what would change my outlook. Until then, I suggest remaining optimistic on AAPL stock heading into year-end.
The AAPL Trade
The post-earnings volatility crush was relatively benign this go around. And that has allowed the implied volatility rank to remain elevated at 56%, suggesting short premium strategies are still paying handsomely.
Since the $160 level is a logical line in the sand, let’s create a trade that profits as long as AAPL stock remains above that price: Sell the Jan $160/$155 bull put spread for 85 cents credit.
The initial trade cost is $4.15 and represents the max loss of the trade, which you will incur if Apple sits below $155 at expiration. Of course, if the stock falls too much, you can always bail early to minimize the damage. I suggest using $160 as your exit point.
The initial credit of 85 cents is the max gain.
As of this writing, Tyler Craig didn’t hold positions in any of the aforementioned securities. Want more education on how to trade? Check out his trading blog, Tales of a Technician.
