Apple (NASDAQ:AAPL) is surging this week, but then again, what isn’t? Pick your asset — stocks, commodities, bonds. They’re all heading northbound. Election fears proved overblown, and traders are back to the business of buying stuff. In turn, AAPL stock is benefiting, and it’s high time we take a fresh look at the chart to see which price levels are worth trading around.
But first, let’s talk about the wicked action in the volatility markets. Why? Because it has implications for which strategy I favor on Apple.
Goodbye Fear
If this is your first rodeo, there’s a lesson to be learned regarding how the CBOE Volatility Index (VIX) behaved around the election. Heightened fear and uncertainty, exacerbated by a rug-pull in stocks in late October, drove the VIX above 40. Such spikes are rare and signal strong demand for market hedges and protection. In the past, these circumstances usually give way to a market rebound — and it makes sense. After all, panic and capitulation transpire near bottoms, not tops.
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This week has seen fear and uncertainty vacate the premises. Although the victor has yet to be crowned, Republicans held onto a Senate majority, and betting markets are pointing toward a Biden presidency. Of all the potential outcomes heading into this week’s contest, it appears the market really likes this one.
That said, traders are unwinding hedges, and demand for options is careening lower. In short, we’re seeing a volatility crush in the options market. The VIX has gone from 41 to 25 in just a few trading sessions.
Moreover, Apple options are responding similarly, and its implied volatility rank now sits at a lowly 25th percentile.
AAPL Stock Charts Spell Stability
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As exciting as this week’s run has been, the truth is AAPL stock is lagging some of its tech brethren. Alphabet (NASDAQ:GOOGL,GOOG), Facebook (NASDAQ:FB) and Microsoft (NASDAQ:MSFT) all boast better-looking trends right now. Nonetheless, AAPL has pushed back to the high side of its 50-day moving average. That places it one step closer to restoring a healthy uptrend. However, what’s really needed before bulls press their bets is a rise above the resistance pivot of $125. Until then, the chart looks more neutral than anything.
Moreover, the sideways moving 50-day and 20-day averages support a call for neutrality and give a reason for a less aggressive outlook. Fortunately, the options market provides plenty of strategies we can use to capitalize. It’s worth noting I would turn bearish if Apple falls below this week’s low point ($107.32). Not only would it reverse the recent rise above the 50-day, but it would also signal the start of a downtrend.
How to Trade Apple Now
With the worst-case, post-election scenarios now off the table, I can see wading back into the waters with a neutral to bullish-leaning Apple trade. The low-implied volatility increases the appeal of bull call diagonal spreads.
The strategy consists of buying a longer-term, in-the-money call option — while selling a short-term, out-of-the-money call. Sometimes referred to as a poor boy’s covered call, this particular spread will yield a profit if AAPL stock moves higher, sideways, or even slightly lower over the coming month.
That said, to minimize the damage if sellers return, consider using the support level at $107.32 as your stop loss.
The Trade: Buy the Feb. $115 call and sell the Dec. $125 call for a net debit around $7.90.
Shoot for a profit of $2 to $3 per spread.
On the date of publication, Tyler Craig did not have (either directly or indirectly) any positions in the securities mentioned in this article.
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