Apple (AAPL) has been bearish since it peaked the beginning of April just over $630. Since that time it has backed up almost 100 points. This provides us with a nice options play on the stock that I would like to share.
Before I share the trade, I think it is important to point out that this move down by Apple is not out of the ordinary. The shares had tumbled since April 1 amid concern that iPad demand will slow and iPhone sales may slump before the release of a new model later this year. Okay, so there is nothing happening with the stock right now. Everyone is waiting until the new releases come out-figuring that product sales would slow down as consumers wait for the newer products to roll out before they buy.
Hedge Funds have been taking profits for months now. SAC Capital Advisors LP and Viking Global Investors LP were among those that sold a net 6.1 million shares of the stock last quarter, taking advantage of the 48 percent jump in Apple stock. It's a yearly occurrence. The last time hedge funds were net sellers of Apple shares was in the first quarter of 2011, when they dumped 7.25 million shares.
With the stock in a full bearish trend, it is a good opportunity to create some income while the stock falls. I like a credit spread on the stock this time using weekly options. If you are unfamiliar with the option strategy, a bear call spread option trading strategy is employed when the options trader (me) thinks that the price of the underlying asset will go down moderately in the near term. It is also known as the bear call credit spread as a credit is received upon entering the trade. So I will buy and sell call options that I am planning on watching expire next week Friday, (May 25th) so that I can keep my credit.
The Options Play
Apple is presently trading at 533.62 at the time of this trade.
- Sell a 590 strike Call option with a May 25th expiration (priced at $0.47)
- Buy a 600 strike Call option with a May 25th expiration (priced at $0.27)
- Net Credit to start: $0.20 or 2.0%
Reasoning behind the Trade
- Apple is in a bearish trend with no sign of turning around.
- I will buy and sell the call options since they lose value while the stock moves down.
- I am 57 points out from the trading point of the stock at this point.
- I don't expect Apple to suddenly gain 11% in value in one week with the markets as bearish as they are.
Like all option trades or stock purchases, there is risk involved and a good risk management program should be in place before a trade is made so the investor or trader knows the risk limit he has defined.