Stock And Option Strategy For The Decline In Apple Stock

Apple stock continues its decline after word today of a strike possibly posing trouble for Apple supplies. But I do not think this is the real story behind the continuing decline in Apple Stock. Decent support in Apple Stock lies around the $580 level. Since the breakout in Apple Stock in early August 2012, there were numerous gaps up and lots of analysts pushing the stock once it got over $675.00. The pullback in Apple stock is not unprecedented and neither is the hype over the stock price going to the moon.

Apple Stock has seen pullbacks before and I am sure will see many more in the future. The question now is where is Apple stock headed and is there a trade available.

Apple Stock Chart

Below is the chart since June. On Friday Apple stock broke the 50 day moving average, which is never a good sign. I believe the stock may try to test the original breakout price. Here are some key aspects of Apple Stock chart at present.

The 10 day simple moving average has crossed over the 20 and 30 day exponential moving averages. The 20 day exponential moving average (EMA) must cross the 30 day exponential moving average (EMA) next before a short-term downtrend is confirmed. Then the 50 day simple moving average (SMA) must cross the 100 day moving average to confirm a medium term downtrend.

A. The Ultimate Oscillator shows Apple Stock is very oversold, but with a reading of 33.15 it is not extreme.

B. The fast Stochastic however is extremely oversold which could lead to a short-term bounce in the stock.

C. Momentum is strong to the downside.

Apple Stock Decline

Apple Stock might try to test its breakout price of $600 to $610

Apple Stock Put Selling

I have received a lot of emails from investors wondering what I think about selling naked puts on Apple Stock. For investors not interested in owning Apple Stock I think selling puts is a poor choice. But for investors who want to own this stock, selling the Nov $600 put for $16.15 (Oct 8 price) puts an investor into the stock at $583.85 which is excellent support. As well there is a good chance that we could see further selling in the stock as October is well-known for its volatility. This would drive up the $600 put making it a good choice for those who want to wade into the stock naked. If the stock holds above $590.00, an investor can:

1) walk away with a bit of profit

2) roll into the next month and lower if they want

3) take assignments of the shares and sell  covered calls into January at support ($580.00)

Other Apple Stock Strategies

There are lots of other strategies that Apple Stock lends itself to. A straddle would be good, a put credit spread would be good.

Selling Options At Extremes Against Apple Stock

Personally I like the concept of selling options at the extreme fast stochastic readings and then closing them for profits when the stock bounces up or pulls back. An investor has to be nimble for this kind of trade. I keep the chart at 3 months and set my fast stochastic to K period of 7 and D period of 3. I then draw a line on the Fast Stochastic at 95% and 10%. Anything above 95% is extreme overbought and below 10% is extreme oversold.

Investors have to have capital available if doing a few option contracts but with the premiums being decent, an investor could easily do just 1 option which at $650.00 is only $65,000.

Basically investors are selling an option at the extreme, either a call or a put. Extreme overbought means sell a naked call. Extreme oversold means sell a naked put. I like selling 3 strikes out of the money and I like going out two months. The daily volatility is what makes this type of trade work.

The strategy has only two steps and requires just the Fast Stochastic.

Apple Stock Selling Options At Extremes Step 1:

I check the fast stochastic chart daily as per the settings above and watch for when the fast stochastic is reaching the red line either oversold or overbought. The following day if Apple Stock continues its move and signals oversold or overbought, I then go to step 2.

Apple Stock selling options strategy

Apple Stock Selling Options At Extremes Step 2:

I turn to the daily chart, sets the reading for 5 minutes and watch for an extreme reading for the day.The fast stochastic settings are left at K period 7 and D period 3. I draw a line at the extremes depending on whether it is a call or put I intend to sell. Today (October 8 2012) it would be a put so I draw the line at 10%. The first time the stock crosses it I would have sold the $625.00 which is 3 strikes out of the money for Nov 17 expiry. In the morning I would have received $26.00 for the put.

Apple Stock Daily chart

Apple Stock daily chart for Oct 8 2012

If Apple Stock had rallied back during the day and the put could be bought back the same day for perhaps $22.00 I would definitely have done this.

A bounce tomorrow could push the put premiums on my Apple Stock $625 Nov 17 put back to $20.00 or $21.00. A $5.00 gain on 1 contract is $500.00 which against $62,500 is 0.8% for one day. In the past 3 months this could have been done 7 times with selling calls (blue arrow) and 4 times with selling puts (green arrow). Studying the trades over those periods, they average out to $395.00 a trade, which multiplied against eleven trades equals a profit of $4345.00 before commissions for a return of 13% based on the three months and a strike price of $625.00. If this can be duplicated for the year the return would be 27% on $62,500.00

The returns of course are theory only because the valuations of the calls and strikes vary considerably over a year but investors can still understand that this simple one day or two day trade means reasonable profits with a small outlay of capital. A strategy like this is well-worth paper trading, which I wrote three articles about this past weekend and which you can start reading with part 1 here.

If an investor takes the time to paper trade the strategy they might be surprised at how often it works on volatile stocks like Apple Stock, with today’s range of $$647.56 to $$636.27. Another good example would be Priceline Stock (PCLN) which today had a range of $622.15 to $632.93. Because the swings in these types of stocks is so wide, it throws the option premiums up and down considerably in a day which is exactly what this kind of strategy needs.

How I Am Trading The Decline In Apple Stock

Presently I am still using the Shark Trading Options Strategy on Apple Stock. Today as the stock fell below $637.00 I got a sell signal and sold my $690 puts which I had bought on Sept 21 for $11.35. I was holding the $690.00 puts for Oct 20 expiry. By selling now, the shark strategy is telling me there is a good chance of a bounce. I will not be doing naked puts on Apple Stock at all as I am continuing to stay with the Shark Strategy.

Shark Strategy On Apple Stock

Shark Strategy On Apple Stock

However with the extreme oversold indication from the Fast Stochastic and the Shark signal to sell my puts, obviously both are signaling that Apple Stock may want to bounce here before possibly moving lower again.

I will be adding the Shark Strategy trades to the member section of my site, shortly. For those interested in the shark trading options strategy you can read a write-up about it and purchase the PDF in the shop through this link.

Apple Stock Decline Summary

For those investors not interested in owning Apple Stock selling naked puts is a poor idea. But for those who want to own shares, being assigned at the $580.00 level is a decent entry point. As well, option premiums are quite good on Apple Stock making it a good possibility that a strategy of rolling put options lower if the stock continues to decline is quite possible and probably for profits with each roll.

As well the Options Selling Strategy I discussed above for selling both puts and calls hold a lot of merit and I hope some readers may paper trade it for a while. Remember that as with all articles, these are my ideas only and are not trading advice or recommendations. Investors can and do lose capital and right now quite a few are losing capital in Apple Stock.

  • Mike

    Thanks for another great post!
    In Step 2, I am assuming there is a typo. Should it be K is 7 and D is 3?

  • Thanks Mike for spotting this. Yes I leave the settings the same as from Step 1. I have fixed that typo.