Apple has been underperforming versus the Nasdaq for the better part of two months. Most recently, AAPL stock bumped its head on the 50-day moving average and that moving average is now starting to turn lower.
Continued weakness in Apple could provide traders with an opportunity to look at a bear call spread option trade.
Bear Call Spread On AAPL Stock
A bear call spread involves selling an out-of-the-money call and buying a further out-of-the-money call.
The strategy can be profitable if the stock trades lower, sideways, and even if it trades slightly higher, as long as it stays below the short call at expiry.
To set up a bear call spread on Apple, we can use the March expiration with a short call at 195 and the long call at 200. That spread sold for 65 cents this morning, meaning traders would pocket $65 in option premium for a block of 100 shares.
The premium received is also the maximum profit if AAPL stock finishes below 195 on March 15. In that case, both options expire worthless and the credit gets kept.
The maximum loss would be $435 with a close above 200 at expiration. By taking the difference in strikes and subtracting the premium received, you can calculate the maximum loss.
While some option trades have the risk of unlimited losses, a bear call spread is a risk-defined strategy, and you always know the worst-case scenario in advance.
Managing The Trade
You could set a stop loss if AAPL trades above 195, or if the spread value rises from 65 cents to $1.30.
As this is a bearish position, traders that think AAPL stock could move higher from here should not enter this trade. The position starts with a delta of -13, meaning it is roughly equivalent to being short 13 shares of AAPL stock.
According to the IBD Stock Checkup, AAPL stock is ranked No. 1 in its industry group. It has a Composite Rating of 76, an EPS Rating of 94 and a Relative Strength Rating of 57.
It's important to 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.
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on X/Twitter at @OptiontradinIQ
