Shares of Apple (NASDAQ:AAPL) closed at fresh new highs on Friday, closing at $217.58. AAPL has now risen nearly 15% so far this month since reporting earnings on July 31. The $1 trillion market cap now is a distant memory as Apple soars ever higher. At some point, however, valuations matter and momentum wanes. Given the magnitude of the recent rally, I expect Apple shares to cool off over the coming weeks.
One of the reasons behind the recent pop was news that famed investor Warren Buffett added to his stake. But even Mr. Buffett may be leery of AAPL at these levels. Apple is now trading at a 19.7 P/E multiple, the highest since 2009. This lofty multiple is also well above the 5-year average of 14.1.
Price to sales is now over 4 and actually above the 2009 levels and at a big premium to the 5-year average of 3.1. Price to book is also at a valuation extreme.
Click to Enlarge The dividend yield of 1.4% is at multi-year lows and at a large discount to the 5-year average of 1.8%. AAPL, by any valuation metric, is certainly not cheap.
Technical analysis paints a similar picture of extremes in Apple. The 9-day RSI is at the highest level over the past year, with a reading exceeding 80. Previous instances when AAPL stock was even close to this overbought proved to be significant short term tops in the stock.
The recent price action is beginning to go parabolic, which never ends well once the momentum breaks. AAPL has risen for five straight days and 11 out of the past 13, so at some point a pullback or even sideways action is likely. Look for the recent red-hot rally to begin to slow in Apple.
Click to Enlarge Implied volatility is still fairly robust at the 31st percentile, especially considering that AAPL is at all time highs. This makes option selling strategies still very viable. So to position for period of consolidation in AAPL, a bear call spread makes probabilistic sense.
AAPL Stock Trade Idea
Buy AAPL Sep $235 calls and sell AAPL Sep $230 calls for a 60-cent net credit.
Maximum gain on the trade is $60 per spread with maximum risk of $440 per spread. Return on risk is 13.63%. The short $230 strike price provides a 5.7% upside cushion to the $217.58 closing price of Apple.
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.
