The Spread Trader: Bull Call Spread On Apple (AAPL)

| November 12, 2012 | 0 Comments

Apple OptionsThere’s no doubt about it, tech stocks have had a rough few months.  And the big daddy of all tech stocks, Apple (AAPL), has been no exception.

In case you didn’t notice, after reaching a new all time high of $705 back on September 21st, Apple’s stock has tumbled $162 lower to around $543 today.  That’s a stunning 23% drop!

Even more astonishing is the fact that the much beleaguered Research In Motion (RIMM) has vastly outperformed AAPL over the last few months.

Maybe I missed something, but this just doesn’t make sense to me.

Last I checked AAPL products were still the most coveted gadgets in the world while RIMM was losing customers faster than rats fleeing a sinking ship.

Yes, I know RIMM’s created some excitement around their new Blackberry 10 mobile operating system.  But will it really change anything?  I sure don’t think so… 

Don’t forget, outside of techies and a few hopelessly addicted crack-berry enthusiasts, AAPL is still the be-all and end-all of tech gadgets.  And despite increasing competition, that’s unlikely to change anytime soon.

In fact, AAPL’s future is brighter than ever…

AAPL’s poised to draw more people into their ecosystem with the introduction of their lower priced iPad mini.  It’s likely to be one of the hottest gifts this holiday season.  And once someone uses an Apple product, they’re more likely to buy additional products from them down the road.

That’s the real beauty of AAPL… they’re not a one trick pony.  They have an entire ecosystem of products.  And once they get a customer hooked into it, they do an amazing job of creating brand loyalty and getting the most out of them.

As far as I’m concerned, the recent selloff is a gift for traders… And the stock is ripe for a rebound from these oversold levels.

Apple

One of the primary principles of technical analysis is that once a resistance line is broken it becomes a future support zone.  And as you can see, AAPL’s recent pullback has reached support of the prior resistance level.

And this particular level was resistance for nearly two years… the chances that AAPL freefalls right through this level are slim and none.  In fact, this is likely a turning point for AAPL. 

This looks like a great opportunity to pocket some quick profits on a bull call spread on AAPL.  This bullish strategy is made by buying one call option and selling another call option at a higher price.

Here’s what to do now…

Buy the AAPL April 2013 $570 call for $37.15 and sell the AAPL April 2013 $620 call for $21.10.

Remember, when buying a call spread, the maximum profit is the difference between the strike prices minus the amount paid for the spread.

This trade costs us $1,605 ($3,715 – $2,110) per spread.  Our breakeven on the trade is $586.05.  If AAPL is trading at exactly $586.05 when the options expire in April, we’ll get our $1,605 back.

 We’ve limited our risk to our initial $1,605 investment.  If AAPL is trading below $570 at the April options expiration, we’ll lose $1,605.  But no matter how far AAPL falls, we can never lose more than our initial investment.

Now for the good part… profits!

Our maximum profit of $3,395 comes if AAPL is trading at or above $620 at April options expiration.   

In other words, we’re risking $1,605 for a chance to make $3,395.  And according to our tracking system, there’s a 40% chance of this trade making money.  That’s a good risk/reward in my book.

Good Investing,

Corey Williams

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Category: The Spread Trader

About the Author ()

A former banking executive, Corey Williams is the Chief Options Strategist and co-editor of our well-known daily newsletter, Options Trading Research. Corey’s extensive experience with options goes all the way back to his days in corporate finance. It was this decade in banking where Corey discovered the most important skill an options trader can have– the ability to analyze a company or sector to determine its likely future direction. And now he’s brought this background, experience and love of options to Options Trading Research, the unique daily e-letter devoted exclusively to helping individual investors profit from the very lucrative options market.