The Best Way to Approach Apple Stock Before Earnings
Apple (NASDAQ:AAPL) is up 110% in a year, which is four times the performance of the S&P 500. So opinions are mixed at these levels and both the bulls and the bears make good points. On the one hand, it has run up so much and so fast that it could correct. On the other hand, the fans would argue that the move in Apple stock is justified and investors have righted a wrong. They would argue that it is now more in line with the likes of Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) and Facebook (NASDAQ:FB).
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Both are right to a degree, but neither are completely correct.
Luckily there are ways to trade AAPL stock into its earnings by betting against both extreme sides. Both sides should temper their stances because somewhere in the middle lies the truth. It is still cheap in absolute terms even though it is now much more expensive relative to its own history. It now sports a price-to-earnings ratio of 29 and sells at 6 times its sales. This is 40% higher than recently typical. But this may be the new norm going forward as they diversify and shift income streams.
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In a prior write up I suggested waiting for better entry points and I reiterate it. I am merely calling for patience for new entrants into the stock. But there are other ways to trade it even ahead of the earnings uncertainty and without immediate risk. Using the options markets, I can bet that AAPL stock has an upside limit. But at the same time, I bet that it won’t completely collapse because it also has a floor. Depending on investor time frames I can do this for the whole year if I want.
Bet Against the Extreme Opinions in Apple Stock
To the committed bears, I acknowledge that the company has run up far and fast. And yes, it is vulnerable to corrections but nothing outside of the normal pullback. Meaning that it won’t fall into an abyss alone. Dips are necessary to shake off the newest bulls who are weak hands. So to put that statement into a trade, instead of buying shares, an investor sells the July $240 put and collects $4 per contract. If price stays above the strike they retain maximum gains.
Conversely, I see the staunch bulls’ point of view. To that I say that Apple has upside but it will not be above $390 by the summer. To trade this thesis, I can also sell the July $390 call and collect $4 per contract. To win, I need the price to stay below my call. The net outcome of both trades is being short an Apple stock strangle, which is a self-hedged trade. The breakeven lines are at $232 and $398.
The main message today is to encourage investors to use logic. It is dangerous to assume that experts know best. Today, retail investors have enough tools and resources to form their own opinions. Those who blindly followed the Goldman Sachs downgrade of Apple’s price target to $165 and sold Apple in fear missed out on $105 of upside.
Often enough, the expert headlines are pure noise that are likely to cause mistakes more so than help. The facts are simple for Apple. They sell out of every widget they make, so in the long run they are winning. By definition, every dip is a buying opportunity. Investors have varied time frames, so the size of the dip is not one size fits all. And that’s where a little homework on the charts provides guidance.
The Road to Promising Gains Isn’t Without Risk
Source: Charts by TradingView
The big breakout in Apple stock happened from around $270 per share. So 18% later it left a lot of mini levels that it might revisit on the way down. Stocks need to retest prior breakout necklines for footing. The first of these is around $310 per share. If that fails, then $305 and $300 are next; $293 and $285 were also important on the way up, so they will provide support on the way down. The zone around $268 per share was also where the breakout accelerated sharply, so it too would make for potential support. The volume profile point-of-control for the last three months is around $265 per share.
For the long term it is futile to try and find the absolute perfect time to buy. So at some point the investors need to decide on how long they are willing to wait for profits and choose the appropriate level to buy. If my intention is to own Apple stock for years, then I am not rushed to buy it, especially not while going into its earnings on Tuesday. The short-term reaction to those is binary. We don’t know what they will say or how the traders will react to the report. So it is better to wait them out or take a partial entry and leave room to manage the risk on dips if and when they come.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. Join his live chat room for free here.
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