Apple Inc. (NASDAQ:AAPL) has had a nice September rally, with Apple stock getting an iPhone 7 boost on headlines from T-Mobile US Inc (NASDAQ:TMUS) and Sprint Corp (NYSE:S). Those two telcos announced record iPhone launch sales. The rally already had legs, but the headlines put it into high gear.
Click to Enlarge Therein lies my dilemma. I am a fan of AAPL, but not at these levels. I don’t fear the company’s short-term fundamentals, but I do worry about the potential for lofty expectations built into October’s earnings.
It’s been a while since markets expected this much from the iPhone. To make matters worse, AAPL opted to not release its launch sales results.
The chance of disappointment is high. So I want to capture the potential disappointment on earnings. To lower my risk, I will leverage my faith in a floor in Apple stock. Also I am long Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) on earnings, so this AAPL bearish bet would balance my earnings plays.
AAPL and GOOGL are market heavyweights. Combined, they make a huge share of the PowerShares QQQ Trust, Series 1 (ETF) (NASDAQ:QQQ). I don’t think markets are ready for another 10% market rally ahead of the elections and a rate hike. So traders will not likely react to all mega-caps like they did Netflix, Inc. (NASDAQ:NFLX).
Trade #1: Buy AAPL Nov 11th $115/$114 debit put spread. This is a bearish trade for which I pay 33 cents per contract to open. This is the maximum I can lose. If AAPL falls through my spread before it expires, I stand to gain 67 cents in profits.
My bearish bet on AAPL earnings is not an statement that AAPL is not worthy of the valuation. It’s a mere bet on short-term stock price action. In fact the second part of the pair trade is bullish AAPL, but at a lower level. This second trade will reduce my out-of-pocket expense.
Trade #2: Sell AAPL Feb $100/$97.50 credit put spread. This is a bullish trade for which I collect 33 cents to open. To win, I need Apple stock to stay above my spread through Feb. The risk is set at 15% under current price.
Taking both trades leaves me temporarily short AAPL for free. As long as AAPL stock holds above my sold spread, any premium I capture from selling the debit spread is pure profit.
I am not required to hold these trades through expiration. I can close either at any time for partial profit or loss. Selling put spreads to finance shorter-term trades only works with tickers that have solid fundamentals to support the stock price in the event of a sell off.
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. You can follow him on Twitter at @racernic and stocktwits at @racernic.
