Apple, Inc. (NASDAQ:AAPL) has had such a long bullish run that it’s remarkable the stock didn’t drop before now. Even when the company announced two weeks ago that it may not meet earnings expectations because of the COVID-19 outbreak, the company only lost 1.8% of its value that day.
What has really hit the stock now is the wider spread of the virus, but that is affecting the whole market.
AAPL swung wildly on Friday, opening 5.94% lower and closing the day 0.06% lower. With situations like this, you never know if the selling is really done, but all the volatility in AAPL has given us a chance to sell incredibly far out of the money options for a decent premium.
Lowered Expectations Could Actually Help AAPL
The COVID-19 headline risk isn’t going away any time soon. Over the weekend, the first two U.S. deaths related to the virus were reported. Deaths in the European Union reached 38. The first cases in New York City were reported.
As of this moment, futures prices indicate the S&P 500 will open lower.
But in premarket trading, AAPL looks strong.
The company recently received an analyst upgrade from Oppenheimer. The analyst in question has suggested the stock is oversold and that the company will prove more resilient than competitors.
With supply being an issue, I do think AAPL’s products will struggle, but I don’t think the analyst’s opinion is entirely off base. AAPL has lowered investor’s expectations by announcing supply disruptions, and as John Jagerson and Wade Hansen pointed out, the company’s press release did say demand outside of China was strong.
It’s also important to remember that this outbreak will be temporary. Retailers may lose sales because consumers are staying home, but an iPhone is a big purchase. If people don’t purchase one during the outbreak, there is a good chance AAPL can make up those sales later.
According to its RSI, AAPL is Oversold
At the bottom of the chart below, I’ve included AAPL’s relative strength index (RSI). Traders often use indicators such as the RSI to determine whether a stock or index is in “overbought” or “oversold” territory.
Typically, an RSI reading above 70 tells traders that an asset is overbought, or overvalued, while a reading below 30 tells traders that an asset is oversold, or undervalued.
As you can see, AAPL’s RSI is sitting below 30, indicating that it is oversold.
Daily Chart of Apple, Inc. (AAPL) — Chart Source: TradingView
All this volatility means we can count on increased premiums from AAPL options, and the fact that the stock is so oversold could mean a bounce is approaching.
AAPL closed at around $257 on Friday, which has acted as support in the past. That only increases investors’ hopes that the stock will head higher in the short term.
The options I am recommending have strike prices well below AAPL’s current levels. The upper strike of this put credit spread is $180, a level AAPL hasn’t touched since July 2019. The stock also has support at $190, which increases the likelihood that this trade will expire worthless, letting traders keep the full premium collected.
Using a spread order, sell to open the AAPL March 20th $180 put and buy to open the AAPL March 20th $105 put for a net credit of about $0.75.
Note: Be sure you are opening the monthly AAPL options that expire on Friday, March 20, 2020.
This is a high-risk trade, so take a small position.
About Put Credit Spreads
A put credit spread is a bullish position that involves writing (selling to open) an option and simultaneously purchasing (buying to open) an option at a different strike price in the same underlying security. The position, or leg, of the spread trade that you sell gives you a cash credit to your trading account. The option you buy limits your risk and lowers your margin requirement for the trade.
This is a bullish trade in which you want the underlying share price to stay above the upper strike price of the spread. In this case, we want AAPL to stay above $180 through the March 20 expiration.
InvestorPlace advisor Ken Trester also brings you Power Options Weekly, which delivers 5 new options trades and his latest trading advice to you each Friday. Trester has been trading options since the first exchanges opened in 1973 with a winning streak that goes back to 1984 with money-doubling average annual profits since 1990.