Apple Inc. (AAPL) suffered the same fate as most companies last Friday, as it fell 2.6% amid pressure ahead of this week’s Federal Reserve meeting. Technically, Apple stock broke through measured targets and now is at a possible bounce level.
Click to Enlarge Fundamentally, Apple is arguably the best company on the planet. AAPL’s midterm future is void of serious Apple-centric risks. Its customers seem stuck for life in the Apple ecosystem and don’t mind the high price points of its products. Management is at worst adequate enough to continue profiting from the success of the iPhone.
In addition to the technical bounce level, investor sentiment will likely lend support to the Apple stock price. I want to capitalize on this drop to enter a long position in Apple stock for next year.
Options are time-sensitive, so I want to give myself time to be right. In this instance, I want to engage through Apple stock options bull put spread, also called a credit put spread. I usually prefer one or two months out, but in this case I want to go out longer.
Here are a few variations of the same trade:
- Trade #1: I sell the Jan 2017 $75/$70 credit put spread. For this, I collect 62 cents per contract. This would be the maximum possible profit. Theoretically, it has a 92% chance of success and yields 13% on money at risk. Total sum at risk is $4.38 per contract if AAPL falls below both legs.
- Trade #2: I sell Jan 2017 $87.5/$85 credit put spread and I collect 55 cents per contract. This one has an 83% theoretical chance of success and yields an impressive 25%.
- Trade #3: I sell the Jul 2016 $85/$80 credit put spread, which potentially pays 50 cents per contract. This version is shorter in time so the 11% potential yield could come faster. Theoretically, it has a 90% chance of success.
Trades Nos. 1 and 3 carry more dollars at risk. Trade No. 2 works better in a small account. I can close any of these trades for partial profit at any time should AAPL bounce.
I specifically chose Apple stock levels that would have survived even during the Aug 2015 flash crash. A fed funds rate decision is coming within days and will likely add risk to all trades, so caution is warranted in general.
As a note, I could have bought debit call spreads in AAPL to execute the same thesis, but I personally prefer collecting money to enter trades than spending it. I think Apple stock is cheap here, but I would rather buy it at $80 per share or lower.
Once general equity markets find footing (hopefully soon!), I could add the debit call spread layer to become even more bullish on Apple stock.
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.
