For the last few weeks, all we heard about is how iPhone sales are going to be a disaster for Apple Inc. (NASDAQ:AAPL). Experts in the media once again erroneously extrapolated bad news from an AAPL supplier, in this case Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM), into being a forecast of bad news in Apple results.
Last night, AAPL reported earnings and the stock spiked sharply on the headline. Management delivered a quarter that was nowhere near the worst case scenario. In fact they beat almost on every metric, they guided well into next quarter, increased their dividends, and they announced a new 100 billion dollar buyback program to boot.
These are not actions of a company that’s worried about its future. iPhone sales, which are very important for Apple, remain strong. Most analysts expected a sharp drop over last quarter’s results and it didn’t materialize. Some even said that Tim Cook would discontinue the iPhone X. Instead, Cook said the X remains their strongest performer. Price remains a non-issue for Apple clientele.
Fundamentally, the story is simple for AAPL. This is a cash cow that is still on rails, even if it has lacked pizzazz with regards to new products. Anyone shorting Apple stock here must have a bearish outlook on the market as a whole. And therein lies my opportunity.
I believe that the stock market should go higher based on the fundamentals at hand. The current Wall Street malaise brought about by headlines of global tariff wars and geopolitical unrest will abate. So fundamentals will win over headlines in the mid- and long-term.
This has been a difficult earnings season for those chasing upside moves on headlines. Case in point is what happened to Caterpillar Inc. (NYSE:CAT) and many more like it. So to be cautious, instead of adding to my long exposure to AAPL stock by chasing upside moves, I will sell downside risk into those who fear unrealistically low scenarios.
I was lucky to be long into the earnings report so this will lower my entry point in my winning trades even if the price stalls here. Time will do the heavy lifting for me. If Apple falls through my levels of risk then I will own shares at a big discount from current levels.
Apple stock sells at a price-to-earnings ratio under 20. So owning shares at a deep discount will not be a financial disaster. Over the long-term, I will profit from them.
Apple Stock Trade Ideas
The Trade: Sell the AAPL Jan 2019 $140 put and collect $3 per contract to open. I have a 85% theoretical certainty that I retain maximum gains. Otherwise, I will accumulate losses below $137.
Those who want to mitigate the risk that comes with selling naked puts can sell spreads instead.
The Alternate Trade: Sell the AAPL Jan 2019 $140/$135 bull put spread, which has about the same odds of winning and would yield 12% on risk. Compare this with risking $169 per share here and without any room for error expect a rally profit.
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Learn how to generate income from options 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.
