Year-to-date, Apple Inc. (NASDAQ:AAPL) has been lagging other mega-caps like Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) and Facebook Inc (NASDAQ:FB). It was even behind the PowerShares QQQ Trust, Series 1 (ETF) (NASDAQ:QQQ). As of yesterday, AAPL stock was red for 2018, while Netflix, Inc. (NASDAQ:NFLX) and Amazon.com, Inc. (NASDAQ:AMZN) were up over 25%.
So the best company on the planet is clearly not getting the respect it deserves. And therein lies my opportunity.
If this stock market flash correction is in its late stages, then I bet that there will be a catch-up trade into Apple stock and I want to profit from it.
Technically, AAPL stock started its correction in January before the market did. The stock fell 8% perhaps on a questionable launch strategy of the iPhone 8 and iPhone X. Then the flash correction took it all the way down to September 2017’s bottom.
Fundamentally, the value in Apple stock is undeniable. Even though I am not a fan of AAPL’s CEO, I think his company is a gem for now and a veritable money making machine. Its stock has a price-to-earnings ratio of 16, which is only one third that of Microsoft Corporation (NASDAQ:MSFT). This is a clear inequity. Yes, there are differences in what the companies are doing with respect to the cloud but still the difference is too large.
What I don’t like about AAPL is its management. Tim Cook took on over $100 billion in debt, which is fine if he used it to enter new income streams. Instead, the bulk went to dividends and buybacks. So, it is still an iPhone company and that is a single sided risk that is very large. It’s not too late and maybe he will surprise us soon. Meanwhile, I continue to profit from it by selling downside risk below solid support.
Experts on Wall Street predominantly have a BUY rating and are optimistic on the price for the coming year. AAPL stock is now trading 13% below the average price target. I can’t imagine any of them lowering their guidance so the threat of a negative headlines there is minimal.
Last night we learned that Wall Street whales Warren Buffet’s Berkshire Hathaway Inc. (NYSE:BRK.A, NYSE:BRK.B) and David Tepper’s Appaloosa added to their positions in AAPL, so that would embolden others to follow suit. Not everyone has conviction in their own research, so they wait to see what the famed investors do and they copy them.
How to Trade AAPL Stock
The Trade: Sell the AAPL Mar 29 $155 naked put and collect $1 to open. There’s an 85% theoretical chance that you would retain maximum gains. But if the price falls below the strike, then you would accrue losses below $154.
Selling naked puts is daunting. Those who want to mitigate that risk can sell spreads instead.
The Alternate Trade: Sell the AAPL Mar 29 $157.50/$155 credit put spread. The spread has the same odds, but it would deliver 20% yield on risk. Neither trade require a rally to profit.
It is important to note that today’s trade doesn’t need a rally to profit. I simply need support for AAPL stock to hold for the next few weeks. Time will then do the heavy lifting and premiums will expire in my favor. But just in case this correction is not over, I have to be ready to own the shares at that level.
Ultimately, 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.