Apple Inc. (NASDAQ:AAPL) is perhaps the most beloved stock of the decade. But it is still an iPhone company and a report of bad sales forecasts can cause a tizzy in its price. This morning we learn of speculation of 2018 cuts from AAPL iPhone X sales estimate. Traders are selling the stock this morning and therein lies my opportunity.
Recently I’ve been successful in catching every AAPL stock knife we’ve seen and I will do so again on this dip here. No, I don’t buy the stock hoping for a rebound. Instead, I use the options market where I can build a moat around my trade just to leave room for error. Just like last time, I will sell downside risk against this morning’s fears. The trick is to choose levels that are proven support then let time do the rest.
This is a strategy I use with fundamentally sound companies and they don’t come much better than AAPL. Fundamentally, it has a price-earnings ratio under 19, which is cheap. Apple’s PE is 40% cheaper than Alphabet Inc (NASDAQ:GOOGL), Facebook Inc (NASDAQ:FB), and Microsoft Corporation (NASDAQ:MSFT). As long as the current economic environment remains relatively the same, AAPL is a buy on dips.
Technically, Apple stock broke out late October to a new level and it has been trading inside of a horizontal channel ever since. This dip here brings it close to the mid-range of it, so there could be more short-term pain before it stabilizes.
Click to EnlargeHowever, since I use options to catch this proverbial falling knife I can start a bullish position now because I depend less on perfect entry points than traditional investing.
On days like today, the fast fall will cause premiums to explode higher, which benefits me as the seller of premium.
Sporadically we have reason to fret over Apple’s prospects. Although I am not a perma-bull in AAPL stock, the company remains on rails until the iPhone story has played itself out for good.
I have been, and remain, a critic of Tim Cook and I believe that the financial engineering is piling on the debt for the wrong reasons. Instead of investing in new venues, they are using a lot of the cash for dividends and buybacks.
The new tax laws will definitely move AAPL in the next few weeks and it could be big. Odds are it won’t be a bearish impact since the new laws were set to benefit companies who were in need of overseas cash advantages. So the shorts won’t be able to sustain the bearish pressure for long. Besides, if the stock falls too far, I bet that Warren Buffet and Tim cook will aggressively add to their ownership of the stock.
The Bet: Sell the AAPL 2018 Jan 26 $157.50/$155 bull put spread where I have an 85% theoretical odds of delivering 8% in yield. Ideally, I need AAPL stock to be above my strike, so I can retain maximum gains.
If I am willing to own the shares I can sell naked puts instead.
The Alternate Bet: Sell AAPL 2018 Jan 26 2018 $157 naked put and collect 85 cents to open. This has about the same chance of success as the spread but I would accrue losses below $156.15.
Neither of these setups requires a rally to profit.
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.