Arguably, Apple Inc. (NASDAQ:AAPL) is the most financially solid companies on the planet and the one with most potential. They sell out of every widget they manufacture and their clientele almost never minds the premium prices they pay. In short it’s a cash machine with years of prosperity still to be had.
However, it is amazing to see the sentiment swings that happen when analyst opinions cause large moves in the stock. One person’s speculation on how sales trends will change soon should not have this much effect on a sure thing.
Thankfully there are ways to profit from such misguided opinions. For example most recently Apple stock fell off a cliff as a reaction to bad results from Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM). Fortunately, I went long the dip on conviction and profited from it.
Once again, extrapolating problems of one supplier into Apple’s prosperity was a mistake. So I come into today with profits in my pocket, but the opportunities to the lies ahead.
I believe that Apple stock is poised to set new highs yet again for several reasons. The first is a fundamental one; Apple has a bulletproof balance sheet and a sales line that won’t quit. The stock is near all time highs so the technical setup favors inviting more momentum buyers.
There’s a good chance that Apple will test the $195 per share in the coming weeks, and if so, then the magnetism of round numbers would kick in on Wall Street. Traders love round numbers, so they would chase the $200 line. Somewhere along the way the experts in the media will prime the headline of AAPL being the first company to reaching one trillion valuation.
On the recent dip, it took a vote of confidence statement from Warren Buffett for investors to feel comfortable owning Apple stock even when the value was so obvious. So dips in the stock will continue to be become buying opportunities for as long as Mr. Buffett is long it. Add to this that the company’s buybacks program and it’s hard to see a crash scenario where Apple falls precipitously on its own.
Having said that, I am not one to Chase upside potential without protection. So today’s setup will be a pair of trade wear I buy into the opportunity of upside prophets but I will also sell against downside support. This way I eliminate the out-of-pocket expense.
AAPL Stock Trade Ideas
The Upside Potential: Buy the AAPL Sep $200/205 debit call spread. This is a bullish trade where I pay $1.40 for a chance to triple my money of price rises through my strikes.
To mitigate my risk I will eliminate my out-of-pocket expense by selling downside risk against support.
The Bank: Sell the AAPL Nov $165 put for $2.65 per contract. This is a bullish trade with an 85% theoretical chance of success. If price falls below $165 I must buy the shares.
The net result of both trades is a net credit. So as long as price stays above my puts the I am a winner already. Any premium I get from selling my calls would be incremental profits.
Click here for more my market thesis and get an ongoing free copy of my weekly newsletters.
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.