Protect Your Portfolio Before AAPL Falls Further

Apple (AAPL) closed below 50dma level again. Apple has pulled back almost $53 from the high since latest earning announcement. When a company announces earnings that almost doubled smashing even the most bullish expectations and the stock was already selling well below the average P/E ratio of the market, how can it continue to fall day after day?

After pulling back ~$80, there are a lot of theories supporting why AAPL has been falling. Some of those are-

  1. This is profit taking as stock has almost doubled from lows since November.
  2. AAPL shares are being unloaded to generate cash for Facebook (FB) IPO and once FB starts trading, money will flow back to AAPL.
  3. Options are driving AAPL share pricing depending upon where market makers’ interest lies.

Whatever be the reason, do take a note that it is down just a 15% from the top on April 10th. Usually when a stock drops 10-15% from the high, it doesn’t create as much buzz. However, since AAPL is in completely different league thus everything around AAPL creates buzz.

So, where is it headed next? No one knows. And those who do don’t talk about it. This article is not to predict where AAPL is headed but rather to give you few “what if” scenarios which might potentially help you in preparation should that “what if” comes true.

First here is a chart summarizing daily price action of AAPL shares during recent past-

  1. The Highest level is $644
  2. Recent low prior to earnings is $555
  3. On May 5th, AAPL closed at $565.25

(click to enlarge)

[Source : TD Ameritrade Charts]

After a 15% pullback, the key question now is where it can go next? There are three possible scenarios-

  1. Reclaim $644 high and rally significantly higher from thereon.
  2. Move sideways between $550 and $644 till a new product is released.
  3. Continue to pullback further. In that case, levels of interest, in my opinion, will be $555 +/-, $537+/-, $504+/- and $470 +/-

(A “+/-” here represents a 1.0% tolerance level)

From a technical perspective and assuming AAPL can continue its growth path even at relatively slower pace, I don’t think AAPL is expensive. There are watch-outs as with any other value investments but don’t assume that AAPL will falter just because you think so. There are no major signs of slow down as of yet.

But on the other hand, recent weakness, for whatever reasons, is also a sign of worry. For this article, let’s run a few risk/reward scenarios, both upside and downside, that might help you in evaluating the path you want to take going forward.

Base Strategy- Long 100 AAPL shares at $56.5K investment

  1. Option Strategy 1- Buy June 550 Put @$15.60
  2. Option Strategy 2- Buy June 550 put @$15.60 and Sell 3x June $600/$625 Call Credit Spread @$4.80 to finance purchase of Put
  3. Option Strategy 3- Buy June 550Put @ $15.60 and Sell June 600 Call @$9.75 to partially finance the put

There is no free lunch with Mr Market. Every strategy has its own risk and reward. There are strategies to profit from downward move. There are ways that you can make money if AAPL moves in either direction, but it will lose money it doesn’t. There are other strategies which can make money if AAPL doesn’t move but will lose if AAPL moves. For this article I am keeping it simple. I am also not including LEAPS etc into the discussion.

The discussion is incomplete without IV discussion. So here is how AAPL IV’s daily chart. (The arrows/and channels are my own emphasis). (Learn more about Implied Volatility).

(click to enlarge)

Based upon above context, here is a summary table of 3 key option strategies-

(click to enlarge)

If you were to ask my opinion which scenario, I would like to go with, I will prefer option strategy #1. Why?

  1. Firstly, for a cost of just 3% insurance, it allows me to benefit most in case AAPL were to rally to new high.
  2. VIX equivalent implied volatility of AAPL, VXAPL, is now below long term mean which simply means that Puts are relatively cheaper in comparison to recent past.

Conclusion: Some may argue that, they were visionary and had a lot of patience since they purchased AAPL shares when AAPL was <$10, and they think there is no need for them to worry and hedge. While it might be a good argument as AAPL has been very rewarding for its shareholders, any money lost/made from hereon is also your money. None of the above scenarios is recommending that you sell your shares and forgo dividend.

A smart investor would like to protect his/her hard earned gains via paying a little bit for the insurance especially during turbulent times.

Profitable Trading, OPподаръци




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