Apple Inc. (NASDAQ:AAPL) has been sweet to investors over the past couple weeks. But don’t let your imagination get the best of you — even the biggest and best companies correct. And while nobody expects Apple to sour overnight, being positioned for that strategy makes plenty of cents … er, sense, too.
Let me explain.
British Apple supplier Imagination Technologies is finding out the hard way what it means to lose a contract with the world’s largest publicly traded company — and when business is heavily concentrated in having that relationship work.
In Monday’s session, foreign-listed shares of the chip designer plunged by roughly 70% after Apple announced is making an internal move to manufacture its own graphics processor units (GPUs) within the next two years.
Investors aren’t exactly applauding the news over at Apple. But with shares situated just off all-time highs following a fairly hefty and extended price run, maybe the reaction is more akin to a “bugger off!” ennui.
The Weekly Chart of Apple Stock
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During the past few months, shares have also become increasingly sweet — perhaps too much so. It’s my view that given this evolving price action, Newton’s law of gravity looks ripe.
One need only look at the provided weekly chart to appreciate how very different the rally off the corrective lows has been over the course of the move higher.
From a fairly cautious-looking beginning with waves of buying followed by more modest periods of selling over several months, 2017 has been marked by a much more confident program of hugging the upper Bollinger Band with nary a pullback. That’s looking technically troublesome for Apple in the short-term.
It’s important to know that the trend is your friend, right up until it’s not. Generally, this transition doesn’t happen out of the blue, and instead occurs when it looks like there’s nothing but blue skies ahead.
Apple is exhibiting this behavior right now.
Don’t get me wrong: I’m not bearish on Apple; I’m simply cognizant of the chart, which clearly has captivated bulls’ imaginations. But it more likely has 3% to 7% downside before making a similar run back to the upside.
How to Trade Apple Right Now
At the moment, I like the 5 May $140/$136/$130 put butterfly.
This trade is priced for a small debit of 30 cents with Apple shares at $143.75. This position carries minimal risk if the stock fails to drop below $140 (roughly 3%) over the next month.
The risk control is a nice feature of this variation on the butterfly spread, especially with earnings slated later this month. Below $140, the position can profit similar to short stock on a move down to $136. At expiration, the potential maximum gain is $3.70 per spread, representing a corrective move of nearly 6%.
The real risk for traders anticipating a pullback while using this strategy is recognizing the impact of the lower and wider $136/$130 embedded bull put spread. The trader’s breakeven at expiration is $132.30. This allows for a maximum loss of $2.05 if Apple falls below $130 at expiration.
Bottom line: If you believe that corrective moves are meant to be bought, then this trade could turn a potentially sour move into a very sweet opportunity.
Investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT.
