Apple Inc. (NASDAQ:AAPL) is arguably the premier global company and the envy of all others. So a downgrade from one analyst is likely to be an opportunity for a trade. The thesis is simple: As long as equity markets, in general, remain this bullish, AAPL will find footing off this morning dip, and this too shall pass.
No, I won’t buy the AAPL shares at face value and hope it recovers fast. Instead, I will use options to set a short-term bullish trade that leaves room for error. The idea is to sell downside risk against proven support then let time do the rest. But I only do this in stocks of companies that I believe are valuable because I may need to own shares should my thesis be broken.
Fundamentally, AAPL has a price-to-earnings ratio under 19. This is too cheap in absolute and relative terms. From that sense, AAPL is 40% cheaper than Alphabet Inc (NASDAQ:GOOGL), Facebook Inc. (NASDAQ:FB), and Microsoft Corporation (NASDAQ:MSFT). So there is definite value and it won’t be a major mistake owning shares under current macroeconomic conditions.
Technically, AAPL started a breakout yesterday. Today’s price action will put that breakout in jeopardy. Although my trade setups will benefit from the success of the breakout, they do not require it in order to yield me maximum profits.
Almost all analysts agree on their exuberant rating of the Apple stock so when one makes a bold downgrade it temporarily catches Wall Street’s attention. Furthermore, the downgrade also included a reduction in price target. This is what happens when a company is viewed as a one-trick-pony. AAPL stock is still tied to the performance of the iPhone.
Click to Enlarge In AAPL’s case, I don’t pay much attention to analyst opinions and I bet I am not alone. They all agree it’s a BUY yet AAPL stock is still trading below their average PTs.
It is important to note that I am not an AAPL super fan. In fact, I am a long-term critic of its current management. I believe that Tim Cook will eventually ruin this gem if he doesn’t change his ways.
He is burying in debt and instead of using the money to make strategic moves, he is busy with financial engineering stock performance with buybacks and dividends. But for now, the cash machine that is AAPL will camouflage leadership inadequacy and I think it’s an easy knife to catch.
The Bet: Sell AAPL Jan 2018 $165 naked put. This is a bullish trade where I collect $1 to open. Here I have an 85% theoretical chance of success. But if the price falls below my strike then I accrue losses below $164.
Selling naked puts is daunting especially near all-time high stock markets and especially on the first day of a downgrade. Those who want to mitigate that risk can sell spreads instead.
The Alternate Bet: Sell the AAPL Jan 2018 $165/$162.50 credit put spread which would deliver over 11% in yield but with much smaller risk. Both setups have about the same odds of success and neither require a rally to win.
Ultimately, regardless of how careful I am, investing in stocks is fraught with danger, so I never risk more than I am willing to lose.
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.
