Shares of Apple Inc. (NASDAQ:AAPL) fell more than 4% on Friday, adding to the nearly 3% drop on Thursday. A downbeat note from Morgan Stanley on iPhone sales and a weak earnings report from major supplier Taiwan Semiconductor Mfg. Co. Ltd. (ADR)(NYSE:TSM) were the catalysts behind the carnage.
While a pullback was certainly warranted given the negative news, the magnitude of the sell off has made Apple stock look very attractive on any further weakness.
In my previous article on AAPL from March 23, I delved into some of the fundamental reasons why Apple stock was looking attractive. With AAPL now at slightly lower levels, all of these reasons — valuation, yield and value — are even more pertinent.
Earnings are due May 1 with expectations of $2.69 in earnings and roughly $61 billion in revenue. Although some analysts look for weaker iPhone sales of 40 million, most of that weakness is factored into Apple stock price at current levels.
On a technical basis, Apple stock is at a critical juncture. There is major support at the $165 level along with the 200 day moving average at $165.52. Bollinger bandwidth is close to going negative which has been a solid signal of a short-term low in the stock over the past year. There is also critical support looming below at the $155 area.
Apple options are trading at the 88th percentile on implied volatility (IV) due to the recent plunge in Apple stock and the impending earnings.
This means option prices are comparatively expensive, which favors option selling strategies. In my prior piece on AAPL I looked to be a buyer of Apple stock at a discount by selling put credit spreads that expired in March. That opinion proved to be prescient as Apple held support. In a similar fashion, I look to sell put credit spreads to be a buyer of Apple stock at an even more discounted level.
AAPL Trade
Buy AAPL May $150 puts and sell AAPL May $155 puts for a 75 cents net credit
Maximum gain on the trade is $75 per spread with maximum risk of $425 per spread. Return on risk is 17.65% The short $155 strike price is structured right at critical support and provides a 6.46% downside cushion to the $165.72 closing price of Apple stock.
Tim may hold some of the aforementioned securities in one or more of his newsletters. Anyone interested in finding out more about Tim and his option-based strategies can go to https://marketfy.com/item/options-and-volatility.
