Reasons For Wednesday's Apple Slump And Options Strategies To Play A Rebound

| About: Apple Inc. (AAPL)

This morning Apple (NASDAQ:AAPL) began falling from the market open and could not find a bid until the $545 level around 11 A.M. Since hitting those lows, AAPL chopped between a range of $547 and $555. After a near 5% down day for the stock, retail investors are left scratching their heads, wondering where $26 billion in market cap went in one day. These few reasons for an Apple sell-off can clarify today's movement and the following option strategies will allow them to play an upside move over the next 9 days.

  • Margin Requirements- confirmed clearing firms were raising margin requirements on Apple stock from 30-60%. This margin requirement increase puts a squeeze on large holders of AAPL stock. With a 30% margin requirement a large fund only needs to have capital equal to 30% of the stock owned. (ex. $550 thousand can get a fund $1.65 million worth of AAPL) An increase from 30 to 60% would require funds to either sell stock, which has been seen today and is a faster short term solution, or allocate higher capital to their position.
  • Capital Gains- As another day passes without a resolution out of Washington, we grow one step closer to higher taxes and falling over the fiscal cliff. After Apple shares rebounded last week, the stock has falling over the past few days. Some fund managers and individuals may be taking capital gains now, with Apple off its November bottoms, if they felt the missed their opportunity before the November sell-off.
  • Court Thursday- Thursday Apple will be back in court for a hearing following its summertime win in the courtroom vs Samsung. The court is expected to announce more information regarding the penalties to Samsung. Samsung is also expected to petition for another trial against Apple.

How to play a rebound?

If you believe Apple has sold off far too much today and in the past few days, over $25 billion today alone, these strategies will allow you to play a rebound giving you the duration of the rest of this week, and next week to be correct.

Strategy #1: Long Call Spread

Buying a call spread is a bullish strategy with limited risk, as well as, limited maximum return. The maximum your position can be worth is the difference between the two strike prices used. The potential loss or risk is the amount you pay for the spread. If we were to use this strategy here, with Apple around $550 our strategy will be using the December 14th expiration options, Buy 550 and Sell the 555 call.

  • 550/555 Long Call Spread
  • Cost: $2.40/contract Debit
  • Potential Maximum Value: $5.00/contract, a 109% return
  • Probability of Maximum Return: 43%
  • Potential Maximum Loss: Your cost, $2.40/contract
  • Break Even: $552.40

Strategy #2: Short Put Spread

Selling a put spread is a bullish strategy with defined risk, in which you will be able to take advantage of Theta Decay, or the decrease in option value from time decay and shrinking days to expiration. Since Apple has falling dramatically its option premium has expanded. Selling options will allow you to collect this extra premium from a volatility contraction. As long as Apple remains above your designated short put, you will keep the entire credit. Again, with Apple at $550, your strategy will be using the December 14th expiration options by Selling the 545 and Buying the 540 put.

  • 540/545 Short Put Spread
  • Credit: $2.00/contract
  • Potential Max Loss: $5.00/ contract -$2=$3.00
  • Probability of Maximum Return: 65%
  • Break Even: $543

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.