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Apple (AAPL) stock is back above the 50-day moving average, although the stock did close off the high yesterday.
By using a combination of option strategies, we could potentially buy the stock for a significant discount, or achieve a healthy profit if the stock trades sideways.
Here’s the trade:
Sell to open the AAPL November 17 put with a strike price of $175, which was trading around $3.10 yesterday.
Then, add a bear call spread:
Sell to open the AAPL November 17 call with a strike price of $190, which was trading around $2.00 yesterday.
Buy to open the AAPL November 17 call with a strike price of $195, which was trading around $0.95 yesterday.
The sold put brings in around $310 in option premium, and the bear call spread adds another $105 in premium. In total, the combination of the two trades generates $415 in premium.
Here’s how the trade looks at trade initiation. The blue line represents the profit or loss at expiration and the purple line shows the trade as of today.
The position starts with a delta of 20, meaning it is roughly equivalent to owing 20 shares of AAPL stock. This figure will change as the trade progresses.
This is how the trade could look in around three week’s time.
Possible Scenarios For This AAPL Stock Option Trade
Let’s work through a couple of scenarios of how this trade could look at expiration on November 17.
- If AAPL stock trades sideways and finishes between $175 and $190, the sold put and bear call spread will both expire worthless. The total profit will be equal to the premium received of $415.
- IF AAPL falls below $175 at expiration, we will be assigned on the sold put and will be forced to buy 100 shares at $175. However, our net cost basis will be $170.85, thanks to the $415 in option premium received. That is 5.84% below the closing price on Thursday.
- If AAPL rallies above $195, the bear call spread will suffer a full loss of $500, but this will be almost fully offset by the $415 premium received, leaving the trade with a small loss of $85.
Company Details
AAPL is currently rated a Weak Buy. The Barchart Technical Opinion rating is a 32% Buy with a Weakening short term outlook on maintaining the current direction.
The market is in highly overbought territory. Beware of a trend reversal.
Of 29 analysts covering AAPL stock, 17 have a Strong Buy rating, 3 have a Moderate Buy rating and 9 have a Hold rating.
Implied volatility is 25.14% compared to a twelve-month high of 43.60% and a low of 17.38%. That gives AAPL stock an IV Percentile of 39% and an IV Rank of 29.60%.
Apple's business primarily runs around its flagship iPhone.
However, the Services portfolio that includes cloud services, App store, Apple Music, AppleCare, Apple Pay & licensing and other services which become the cash cow.
Moreover, non-iPhone devices like Apple Watch and AirPod have gained significant traction.
In fact, Apple dominates the Wearables and Hearables markets due to the growing adoption of Watch and AirPods.
Solid uptake of Apple Watch also helps Apple to strengthen its presence in the personal health monitoring space. Apple also designs, manufactures and sells iPad, MacBookand HomePod.
These devices are powered by software applications including iOS, macOS, watchOS and tvOS operating systems. Apple's other services include subscription-based Apple News, Apple Card, Apple Arcade, new Apple TV app, Apple TV channels and Apple TV, a new subscription service.
Summary
While this type of strategy requires a lot of capital, it is a great way to generate an income from stocks you want to own.
If you end up being assigned, you can start selling covered calls against the stock position.
You can do this on other stocks as well, but remember to start small until you understand a bit more about how this all works.
Mitigating Risk
With any option trade, it’s important to have a plan in place on how you will manage the trade if it moves against you.
Some traders like to add a deep out-of-the-money long put to reduce risk. For example, a November 17 put option with a strike price of $150 could be purchased for around $30. Buying this put, would cap losses below $150 and reduce total capital at risk.
Please remember that options are risky, and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
On the date of publication, Gavin McMaster did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
