Shares of Apple (NASDAQ: AAPL) closed above the $200 level for the first time yesterday following an earnings report that was met with seeming unilateral praise. Today, AAPL has hit a $1 trillion market cap. So Apple stock seems to be an unstoppable force. The contrarian in me, however, is sensing that the rally may be getting a little too hot in Apple. I look for a short term pullback over the coming weeks.
While certainly the earnings report and guidance were solid from Apple, the reaction in the stock definitely was a little overdone. The all important iPhone sales actually missed expectations of 41.79 million, coming in at only 41.3 million. Important to note that valuations (for those who still care about such trivialities) are getting stretched as well. AAPL stock now sports the highest P/E levels over the past 5 years and is fast approaching a 20 multiple. Previous times Apple carried such lofty multiples led to sharp pullbacks in the share price.
AAPL stock is getting extremely overbought from a technical perspective. 9 day RSI has breached the 70 level, a euphoric reading that has marked significant short term tops in the past. Apple is also trading at a major premium to the 100-day moving average of $182.35 which is another sign of over exuberance. Previous times that AAPL stock traded at similar premiums to the 100-day moving average have almost inevitably led to a pullback toward that average.
In my previous analysis on Apple from June 20, I had a bullish viewpoint on AAPL stock with shares trading around the $183.50 level. Now that Apple had cruised past $200 and touched the $207 mark, my bullish outlook has tempered-because price does matter.
Implied volatility (IV) in Apple options has dropped dramatically post earnings to the 28th percentile, meaning option prices are comparatively cheap. The historic volatility (HV) remains heightened in AAPL stock given the recent big price swings at around 52%. This favors long volatility strategies when constructing trades. So to position for a pullback in AAPL stock, a short term put calendar makes probabilistic sense.
AAPL Trade Idea:
Buy AAPL 17 Aug $195 puts and sell AAPL 10 Aug $195 puts for 60 cents net debit
Maximum risk on the trade is $60 per spread. Ideally AAPL stock pulls back towards the $195 area at the August 10 weekly expiration of the short put. the trade is net short 4 deltas at inception, or the equivalent to being short 4 shares of AAPL 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.