New Trade – $AAPL Picking

by Dan December 20, 2013 2:20 pm • Commentary

Some traders I know look at the 1 year AAPL chart and they see nothing other than a long term bottom forming with the price action this past spring and summer amounting to a double bottom of epic proportion:

AAPL 1yr chart from Bloomberg
AAPL 1yr chart from Bloomberg

The stock stalled out after a fairly impressive rally of almost 50% from the June lows to the highs made earlier this month as it appeared that investors did not receive the expected and highly anticipated Christmas gift of iPhone selling at China Mobile for the Holidays.  I am inclined to think that where there is smoke there is fire and that deal will be in place soon, but the stock’s 3% year to date gains leave much to be desired.

The stock could be range bound into year end as investors re-position for 2014, and the stock appears to be pinned today to $550.  My sense is that the stock is bought early in the new year as investors anticipate a return to earnings growth after last year’s blip.

IN the very near term I want to make a defined risk bullish bet that AAPL holds current levels over the coming weeks and closes slightly above.  I want to look to short premium trades over the holidays as I expect a quieter trading environment coupled with two and half days off for Christmas and New Year’s day.

TRADE: AAPL ($550) Sold Jan 3rd Weekly Expiration 550/540 Put Spread at 4.00

-Sold 1 Jan 3rd 55o Put at 9.40

-Bought 1 Jan 3rd 540 Put for 5.40

Break-Even on Jan 3rd weekly expiration:

Profits: up to 4.00 btwn 550 and 546, max gain of 4 above 550

Losses: up to 6.00 btwn 560 and 540, max loss of 6 below 540

Trade Rationale:  This trade is profitable if AAPL is above 546 two weeks from today, with a max profit at 550 or above.  It’s not a very bullish bet in that the max gain is $4, but it is playing for higher prices over the next 2 weeks.  Given that AAPL stock is up 40% in the past 6 months, consolidation or a small rise might be the more likely scenario during the holidays, which is the reason for a short put spread as opposed to a long call spread type structure.