Apple Short Strangle Could Net $285 In 3 Weeks

Apple (AAPL) is currently showing above average volatility with an IV Percentile of 79% and an IV Rank of 50.44%.

AAPL rates as a Strong Buy according to 18 analysts with 4 Moderate Buy, 8 Hold and 1 Strong Sell ratings.

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.

Today, we’re going to look at a short strangle trade due to the high IV percentile.

A short strangle aims to profit from a drop in implied volatility, with the stock staying within an expected range.

When implied volatility is high, the wider the expected range becomes.

The maximum profit for a short strangle is limited to the premium received while the maximum potential loss is unlimited. For this reason, the strategy is not suitable for beginners.

AAPL SHORT STRANGLE

Traders that think AAPL stock might remain stable over the next few weeks could look at a short strangle.

As a reminder, a short strangle is a combination of an out-of-the-money short put and an out-of-the-money short call.

The idea with the trade is to profit from time decay while expecting that the stock will not move too much in either direction.

For AAPL stock, a September 27 put with a strike price of $205 could be sold for around $1.45.

Then the short call, placed at the $235 strike, could be sold for around $1.40.

In total, the short strangle will generate around $2.85 per contract or $285 of premium.

The profit zone ranges between $203.15 and $136.85. This can be calculated by taking the short strikes and adding or subtracting the premium received.

If price action stabilizes, then short strangles will work well. However, if AAPL stock makes a bigger than expected move, the trade will suffer losses.

Conclusion And Risk Management

One way to set a stop loss for a short strangle is based on the premium received. In this case, we received $285, so we could set a stop loss equal to the premium received, or a loss of around $285.

Another way to manage the trade is to set a point on the chart where the trade will be adjusted or closed. That could be around $210 on the downside and $230 on the upside.

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.