Is Apple Entering A Trading Range?

May.22.12 | About: Apple Inc. (AAPL)

In my latest Apple (NASDAQ:AAPL) article, I asked if Apple stock is manipulated. My argument was that there was no visible reason for dramatic climb and equally dramatic decline.

The article generated a fair amount of comments; most of them have just confirmed how high the emotions are right now on Apple. My article just mentioned some of the obvious facts, in no way was it a negative article or an advice to buy or sell the stock. My guess is that many comments came from the frustrated investors who have purchased the stock at its high of $644 and are very surprised now to find themselves losing money. Wasn't AAPL supposed to be a sure thing, going up 100 points every month? Emotions are never good thing in investing.

Like I mentioned, I didn't buy the stock when it was at $644 and I don't buy at $530 or $560. Instead I'm playing it with the options non-directional strategies. I shared some of them with Seeking Alpha readers.

The latest price action is suggesting that Apple might be entering into a trading range. The best strategy to take advantage of the trading range is Iron Condor. The Iron Condor is a combination of a bull put spread and a bear call spread. The whole trade is done for a credit.

With Apple trading around $565, looking at July expiration we can execute the following trade:

  • Buy AAPL July 2012 495 put
  • Sell AAPL July 2012 500 put
  • Sell AAPL July 2012 640 call
  • Buy AAPL July 2012 645 call

The trade can be done for $1.35 credit. The margin requirement is $365 hence the maximum gain is 37%. The trade is resilient to 12-13% move of the stock in either direction. Based on the deltas of the short strikes, it has about 70% probability to make money. This is the P/L graph (generated by OptionsOracle):

Click to enlarge
(Click to enlarge)

The July options expire before the next earnings report, so we not taking an earnings risk here.

If you are still worried about a big move, you can partially hedge yourself with a Reverse Iron Condor using weekly options. The trade has an opposite P/L from the Iron Condor trade - it benefits from the short term moves in the stock.

Please note that in the first trade we are selling the body and buying the wings while in the second trade we are doing the opposite (hence the name Reverse Iron Condor).

The general idea is that we are taking advantage of short term volatility of the stock. But the first trade can sustain a fairly large move in the next two months and still make money. Of course risk management is critical in both trades. You must set a reasonable stop loss and adjust or get out of the trade once it is hit.

The trades are presented for educational purposes only. They deserve further attention if you don't want to continue predicting where the Apple stock (or any other stock for that matter) will be in the future. This is not a trade recommendation. Please do your own homework and use this article as a starting point for your analysis.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.