In early February, we ran headlong into a sharp stock market correction as the economy appeared to overheat. Since then, the biggest problems to sentiment have been a slew of self-inflicted negative headlines. That is, the White House rattled investors’ cages by announcing tariffs and staff changes. So it’s understandable that investors booked their profits, even in quality stocks like Apple Inc. (NASDAQ:AAPL).
It wasn’t so much that bears were pressing too short, but rather bulls booking profits!
What’s not understandable to me is the sharp u-turn on value stocks that are already cheap. Facebook, Inc. (NASDAQ:FB) perhaps exacerbated things also.
Apple stock sells at a price-to-earnings ratio under 20. So owning it at a discount from here will not likely be a major financial disaster. And therein lies my opportunity.
While I don’t approve of Apple’s current management mainly it’s CEO, I do think that it is a money-making machine that has a few years left before it starts to deteriorate. Until then I believe Apple stock will be higher by year-end. So today I’d like to set a bullish trade into earnings to profit from it.
Since headlines are still flying fast, I will use Apple’s stock options rather than risk $173 at face value to buy the shares right now with no room for error. With options, I can go long AAPL shares with no money out of pocket. Worst case scenario is that I own it for a deep discount from current price.
Fundamentally, Apple Inc.’s business metrics are fantastic. But there are risks. For one, I fear is that there’s not enough innovation to sustain the momentum for too long. Secondly, we still have risks related to tariff headlines. Apple is still an iPhone company, which makes it vulnerable to China’s retaliation to U.S. tariffs.
Technically, Apple stock has traded inside a channel where $164 per share has been an important pivot. It held as support except for the February deepest flash point. $145 per share is another major pivot that served as a launch pad for a 25% rally from last April.
So the bottom line is that I’d like to use the high CBOE Volatility Index (INDEXCBOE:VIX) to generate income from what others fear, and invest that into upside potential of a rally into the AAPL earnings.
Headlines aside I believe that the macroeconomic conditions still favor upside potential in the stock market. Companies have too much money for it not to hit the streets. Consumers are in better shape than last year thanks to tax cuts so they are likely to continue spending. The bear thesis without new inflammatory headlines is thin.
The Trade: Sell AAPL July $135 put and collect $1 per contract to open. Here I have a 85% theoretical chances that price will stay above my level. Else, I will accrue losses below $134.
Selling naked puts is daunting. Those who want to mitigate that risk can sell spreads instead.
The Alternate Trade: Sell the AAPL July $140/$135 credit put spread which would deliver over 10% in yield but with much smaller risk.
I can leverage my premium by using it to buy a debit call spread for more potential profit.
The Juice – Optional: Buy the AAPL 4 May $177.50/$180 debit call spread for 95 cents. If Apple stock rallies through my spread I double my money.
As long as Apple’s stock stays above my sold puts, any premium I recover from selling my call spread is pure profit.
Get my free newsletter and subscribe to my YouTube channel 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.