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Zach Bass (a.k.a Ernie Varitimos) is Chief Bloviator of Investor in the Wilderness. He has 30 years experience as a Tech Maven, Investor and Consultant. Zach has been using Macs since their introduction in 1984, and investing in the markets just as long. His mission is to help guide all level of investors through the Apple Ecosphere and make sense of the markets. Zach's take on Apple, the markets, and life pursuits, will keep your mind tuned.

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Post Labor Day Apple Trading Strategy

September 1st, 2008 • Related • Filed Under
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There’s growing sentiment that Apple and the markets, particularly the Tech Sector, will rally going into the latter part of 2008. In the near term, there’s technical indicators that the major indices will start this rally soon, as the weekly and monthly charts favor such a move. But we can expect some turmoil from Gustav, and the back and forth action that is indicative at the tail end of a bear market.

So, if we’re not exactly sure where AAPl will be in the near term, but reasonably confident that it will advance soon after, what types of trading strategies should we employ?

From a technical point of view, AAPL has been developing a solid base over the past several months from which to advance. However the retreat last week among the Horsemen of Tech (AAPL, GOOG, BIDU, and RIMM) has shown some cracks in the Tech leaders, as some fell below their respective 50-day moving averages. AAPL ended smack dab on it’s 50 Day SMA, but lost its 50 Day EMA, and the Nasdaq gapped down after a great advance the day before. So unless we see some uniformity among the Tech leaders, we may see some more sideways action for a while.

So, what kind of trading strategy do you employ when you’re unsure of the near term, but confident that the general direction is bullish? If trading options was not an option for you, then you would likely sit on the sidelines waiting for a confirming indicator before committing your capital. But with options, there are trades you can execute that will make money even if AAPL price is stagnant, or if it simply wavers back and forth.

The trade strategy to employ in such a case is called a Bull Put Spread. With this strategy, you can make money three ways, where buying plain old stocks, you can make money only one way, if the stock price goes up. With a Bull Put Spread you make money in all the following cases:

  1. Price stays stagnant or moves up
  2. Price goes down, but stays above strike price
  3. The contract expires

A Bull Put Spread is a multi-leg trade, very similar to a Bull Call Spread, in terms of the profit and loss levels. But a Put Spread has advantages, and some disadvantages over the Call Spread. A Bull Put Spread is generally executed by selling a Put at or near the money, and buying a Put out of the money. In this case, that would mean the buying and selling the following contracts:

Bullish Put Spread - AAPL Sep 2008 160/165
Strike Price Symbol Option Value Delta Theta
$165 APVUM $3.4753 -0.3511 -0.1335
$160 APVUL $2.0359 -0.2312 -0.1137

Net Credit Trade
One of the advantages of this trade is that it’s a net credit trade, meaning that it costs you nothing, other than the capital it ties up during the time you hold the position (due to margin requirements). In fact your broker will deposit funds into your account after you execute the trade. And though you can’t use those funds until you either close the trade, or until the expiration of the contract, it will accumulate interest.

Uses the Time Value of the Contract
This trade is timely. That is it plays on the time value left in option contracts, which will diminish to zero as the contract nears the Options Expiration (OE) date. This is the day when all September 2008 options contracts will expire, which is September 19th. So, as long as the price of AAPL does not fall below the break even point by OE, the contract will be profitable.
 
Support Levels
So, AAPL is currently at $169.53, sitting at or about the 50-day moving average, which is actually $169.74. The 200-day moving average is below this at $163.76. This is important because that represents very strong support that will help prevent this from becoming a losing trade. Now, if you’re generally bullish, then you think as I do, that over the next couple of weeks, AAPL is much more likely to advance a bit than decline. And if AAPL price can get above the 50-day, and plot some distance from it, then it will become strong support. 

The Trade
This type of trade is considered a conservative strategy and thus low risk and limited profit. However, the the amount of profit, and potential gain vs the amount of capital needed to execute the trade is quite good for such a low risk position!

The table below shows the trade and the outcomes based on the current values of the options. The calculations are pretty straight forward. The break even point is the price of the underlying, which is obviously AAPL, where you make money above this price, or lose money below this price. The ideal would be that the contracts expire and that the price of AAPL stays above $165. Then you would realize the full profit potential of the trade.

If the trade starts to go south, it should be quite easy to exit the position, as the open position is quite large, and thus these contracts should be quite liquid. So, if you don’t feel comfortable at any time between now and expiration simply close the trade.

Click here for a simple excel spreadsheet that was used to calculate the values.

Chain Symbol Break Even Max Profit Max Loss Return on Risk
Sep 160/165 APVUL/APVUM $163.54 $145.57 $354.43 41.07%

Intra and Post Trade
If the trade works out and AAPL price advances above it’s current 20-day moving average, which is currently at $171.69, then I would suggest you consider the trade in the table below, by purchasing either AAPL stock, or Call options purchased with the proceeds from the Put Spread. I have posted a variation of this trade in other posts. It’s based on strong support levels, and the potential for the positive divergences on the weekly charts of the S&P and Naz to kick in soon.

AAPL Long Swing Trade
Best Entry $172.00-$176.00
Target $190.00
Stop $168.00
Risk:Reward Medium - High

If you’re looking to become a better trader, and how to best navigate turbulent markets, and most importantly, how to keep the money you have, then you should check out the Wilderness Investors Group. Click here to learn more and request membership. We have a vibrant community of professional and individual traders where you will learn how to exploit the markets and master the secrets of the trade.


More on this topic (What's this?)
Buy, Sell or Hold: Apple Inc. (Money Morning, 11/10/08)
Apple (AAPL): Steve Jobs' Replacement? (market folly, 11/19/08)
7 Great Lessons to Learn From Apple in the Last Year (Stock Trading To Go, 9/29/08)
Apple (AAPL) at Make or Break Point (market folly, 9/8/08)
Read more on Apple at Wikinvest

Viewing 4 Comments

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    http://www.marketwatch.com/news/story/stronger-...

    i know i mentioned this in a wildernes post late last week, but zach didn't post it, he's monitoring and censoring my posts---

    of course he can go over to tim's blog and post anything he feels--

    thanks zach, welcome to communist russia--pam

    only zach can post a post with a stop at 170 and then later change it to 169.

    i wonder what happened to all those followers whoset the stop at 170
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    Ed, the link you added is quite interesting. Your comment to this post would have been so much more useful to the community of readers had you referenced it rather than bash unrelated items. The suggestion that a strong dollar may make it difficult for high fliers like Apple to compete on a global scale is certainly a legitimate concern. But my feeling is that the dollar has a long ways to go on the road to recovery before it would be considered a detriment. In fact, it's hard for me to imagine where a strong dollar would ever be a detriment. So, I guess I whole heartedly disagree with this assertion. Besides, I don't really see how it has relevance to the subject matter of this blog post, which is about trading strategies using options.

    Ed, you find it necessary to use this venue to criticize my actions, but you have the perfect opportunity to help the community with your insights. Please stick to more constructive comments, or I WILL censor them. By the way, you may think this venue is your personal sounding board to say anything you like. Well it's not. So, while I'll be tolerant to a degree, there's only so much that I'll take before moderating you.
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    What call strategy do you suggest for October calls?
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    Well Marcos, this depends entirely upon the risk you are willing to take. But let's assume a low risk, low cost strategy. You could accomplish this with another vertical spread strategy, which is similar to the Bull Put Spread, called the Bull Call Spread. This is where you sell an out of the money Call to offset an in the money Call. This effectively allows you to buy an in the money call at a discount.

    The profit chart looks very much like the Bull Put Spread, but it is a net debit trade, meaning that funds will be debited from your account when you execute the position. It also means that there is a limited upside, as well as a limited downside. But because the net cost is small, the downside is limited.

    You would use this strategy if you are bullish, but think the near term will result in a moderate increase in price. This type of strategy is very useful in our current environment where we have a lot of whipsaw, and you recognize an opportunity for a near-term advance. So I would suggest a way to construct this trade would be to buy an Oct 165 Call and sell an Oct 170 call.

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