Apple AAPL appears to be bouncing back after a rough second half of February. From February 16 through last Thursday, the shares dipped from an annual high near $365 to below the $340 level.
Last Friday, as the market put in its first positive session for the week, Apple shares began to claw higher as well and have already recovered back above the $350 level. After rebounding off its 50-day moving average last week, the stock has now moved back above its 10-day and 20-day moving-average trendlines.
Fundamentally speaking, new estimates suggest that up to one million iPhones have already been sold to patient Verizon customers. Roughly 600,000 of these were pre-orders. Elsewhere, the latest version of the MacBook Pro hit stores last week and the iPhone 5 is expected to debut for both Verizon and AT&T customers this summer.
AAPL is currently trading at $352, which is a whopping $35,200 for 100 shares. Bullish investors who want to invest in the stock at a lower price might consider option strategies, such as the one we have outlined below. Similarly, Apple skeptics who feel a setback in the shares is imminent could also consider an option strategy in lieu of shorting the shares.
The strategy descriptions below are for educational purposes only and do not constitute buy/hold/sell recommendations. All prices below are from Tuesday morning.
Neutral to Bullish Option Strategy: Ratio Put Spread
Investors who want to participate in the Apple craze without shelling out the price of a lower-end luxury automobile might look into a strategy such as a ratio put spread. By selling two farther out-of-the-money puts (the April 335 puts) and buying one closer-to-the-money put (the April 345 put), an investor can build a moderately bullish position and collect a credit of $4.85 up front.
At expiration, the maximum profit is $14.85, or the difference in strikes plus the credit collected. This maximum profit is achieved if AAPL is trading right at $335 when the options expire. Meanwhile, anywhere above the 345 strike, gains plateau at the $4.85 credit collected.
The breakeven price for this strategy is $320.15, which is the short put less the maximum potential profit. Anywhere above this level, the trade will be profitable, and this allows for roughly 9% of downside before the position enters losing territory.
Below the downside breakeven, the position is exposed to losses all the way to zero. This is due to the one uncovered short put, which is in-the-money below the 335 strike. This strategy is considered moderately bullish because it profits if the stock moves higher, stays put, or declines moderately.
The profit/loss chart below illustrates how this trade will look at expiration. To see how changes in time until expiration, stock price, and volatility may impact the position, open a virtual trading account.
Bearish Option Strategy: Bear Call Spread
Those on the bearish side of the Apple fence might consider a bearish strategy such as a bear call spread. The March 350/355 call spread can currently be sold for a credit of $2.60 by selling the March 350 call and simultaneously buying the March 355 call.
If Apple is trading anywhere below the 350 strike at expiration, the position earns the maximum profit (the $2.60 credit collected). Losses, meanwhile, are capped at $2.40, which is the difference between short and long strike less the initial credit. Maximum loss occurs anywhere above the 355 strike. Breakeven for this spread is $352.60 – the short spread plus the credit collected.
Photo Credit: naan
The above information is provided by OptionsHouse, LLC (“OptionsHouse”) for informational and educational purposes only and is not intended as trading or investment advice or a recommendation that any particular security, transaction, or investment strategy is suitable for any specific person. You are solely responsible for your investment decisions. Commentary and opinions expressed are those of the author/speaker and not necessarily of OptionsHouse. Neither OptionsHouse nor any of its employees, officers, shareholders or affiliated companies guarantee the accuracy of or endorse the views or opinions of guest speakers or commentators. Projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature and are not guarantees of future results. Any examples used that discuss trading profits or losses may not take into account trading commissions or fees.
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