Shares of Apple Inc. (NASDAQ:AAPL) certainly have been on a tear since their latest earnings report. Earnings, revenues and guidance all beat estimates, but the stock reaction has now far outpaced any earnings-related justification. While I am not overly bearish on Apple going forward, I feel AAPL stock has come too far, too fast and is due for a consolidation.
Apple is now trading at the richest P/E ratio over the past five years, with a multiple exceeding 19. The previous time AAPL stock even approached such a rich valuation was in November 2014, which coincidentally signaled a major top in the stock price.
Click to Enlarge A market cap now exceeding $900 billion will also make it more difficult for Apple to grow simply by the law of large numbers, thus making it tougher to justify a higher P/E multiple.
From a technical perspective, Apple stock price is definitely getting overbought. The 9-day RSI is over 80, which previously marked a significant intermediate-term top in AAPL. Apple is also up over 12% since making a low on Oct. 25 and had risen nine out of the past 10 days. Shares are trading at a huge premium to the 20-day moving average of $164.20, yet another sign of overexuberance.
The mere fact that AAPL stock finally had a down day after the latest run may likely lead to some profit taking by momentum players.
Click to Enlarge So to position for a coming period of consolidation in AAPL stock, a short-term out-of-the-money call spread makes intuitive sense.
AAPL Stock Trade Idea
Buy AAPL Nov $180 calls and sell AAPL Nov $177.50 calls for a 50-cent net credit
Maximum gain is $50 per spread with maximum risk of $200 per spread. Return on risk is 25%. The short $177.50 strike price is well above the Apple all-time high of $176.24.
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.
