Options Combination on Apple Stock Could Provide a Nice Entry Point

Apple (AAPL) stock is breaking out to a new high and is showing strong relative strength.

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 May 19 put with a strike price of 145, which was trading around $3.30 yesterday.

Then, add a bear call spread:

• Sell to open the AAPL May 19 call with a strike price of 170, which was trading around $2.75 yesterday.
• Buy to open the AAPL May 19 call with a strike price of 175, which was trading around $1.60 yesterday.

The sold put brings in around $330 in option premium, and the bear call spread add another $115 in premium. In total, the combination of the two trades generates $445 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 15, meaning it is roughly equivalent to owing 15 shares of AAPL stock. This figure will change as the trade progresses.

This is how the trade could look in around one month’s time.

Possible Scenarios For This Apple Stock Option Trade

Let’s work through a couple of scenarios of how this trade could look at expiration on May 19.

• If AAPL stock trades sideways and finishes between 145 and 170, the sold put and bear call spread will both expire worthless. The total profit will be equal to the premium received of $445.
• If AAPL falls below 145 at expiration, we will be assigned on the sold put and will be forced to buy 100 shares at 145. However, our net cost basis will be 140.55, thanks to the $445 in option premium received. That is 10.71% below the closing price yesterday.
• If AAPL rallies above 175, the bear call spread will suffer a full loss of $500, but this will be almost fully offset by the $445 premium received, leaving us with just a small loss of $55.

So, the worst case scenario is a very large drop in Apple stock, but even then we get to buy a quality company for a significantly lower price than it is trading today.

Company Details

Apple is currently rated a Buy. The Barchart Technical Opinion rating is a 56% Buy with a strengthening outlook on maintaining the current direction. 

Of 24 analysts covering AAPL, 18 have a strong buy rating, 3 have a moderate buy rating and 3 have a hold rating.

Implied volatility is 27.70% compared to a twelve-month high of 44.98% and a low of 22.49%. That gives AAPL stock an IV Percentile of 16% and an IV Rank of 23.18%.

Apple is due to report earnings on April 27, so this trade would have earnings risk if held through that date.

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 May 19 put option with a strike price of 110 could be purchased for around $35. Buying this put, would cap losses below 110 and reduce total capital at risk from $14,000 to $3,000.

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.

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