On Friday, May 31st when shares of Apple (AAPL) were trading $175, down nearly 20% from the prior month’s post-earnings highs, I detailed a strategy to gain upside exposure over the course of the summer (As American as Apple iPhone) in the stock in the event of easing trade worries, offering the company to issue better than expected second half guidance, here was the rationale and strategy:
If I were looking for a long entry in AAPL, suspect there is some more near term downside, but optimistic that a resolution to the China trade dispute will happen this summer (which I am not, at least a substantive one) then it makes sense to consider bullish risk reversals in AAPL looking out to Aug expiration that will include their fQ3 results and guidance. It makes sense to use the support and resistance levels detailed above to help in from the strikes of the bullish trade.
Bullish Trade Idea: AAPL ($175) Buy Aug 150 – 195 Risk Reversal for Even Money
-Sell to open 1 Aug 150 put at $2.75
-Buy to open 1 Aug 195 call for $2.75
Break-even on August Expiration:
Profits above 195
Losses below 150, put 100 shares at 150 per 1 put contract sold short.
I discussed the trade idea on CNBC’s Options Action that afternoon:
On this past Friday’s Options Action (after some very initial downside the next trading day of detailing this idea) with the stock at $190 a week later, I detailed how I might manage the trade with the stock approaching the long call strike:
As I write the stock is up 2% from Friday’s close very near $194 and as I said on Friday’s show, the most important thing now is to manage the worst case scenario of this trade idea, and that is to cover (buy to close the downside put) and then to focus on how much of the trade ideas gains are you willing to risk from here on out… basically how much more upside do you think the stock has from here.
With the stock at $193.80, the short Aug 150 put can be bought back fro 65 cents. The Aug 195 call can be sold at $9.
The initial trade idea could have been put on for no cost when the stock was near $175, so this position right now would have a gain of about $8.35 on an $18.66 rally to the upside.
At this point, one could merely take the profit, sell a higher strike call to make a call spread, or roll a portion of the profits into another call or call spread. At this point, I think it makes sense to take gains and look for another China trade-related headline to weigh on the market, and this stock, in particular, to offer a better entry point for further sustainable gains in the stock in an attempt o re-test its prior highs.
Action: AAPL ($193.80):
-Buy to close Aug 150 put for 65 cents,
-Sell to close Aug 195 call at $9 for a gain on the position of $8.35