All eyes are on Apple this week because the tech juggernaut has a pretty little pullback pattern. Allow me to illustrate one way (of many) that we might trade it. This is NOT A TRADE RECOMMENDATION. I simply want to demonstrate a few things:

First, what a classic bull retracement pattern looks like

Second, what I like to have implied volatility levels at for credit spreads

Third, how I think through building a bull put spread

Fourth, how I use scaling to improve my odds of success.

Let’s begin with the chart. AAPL boasts a textbook bull retracement setup except for one minor variable: volume. A picture perfect retracement would have lower than average volume during the price drop. Apple has had higher than average volume over the past three days (and it’s well on its way to having above-average volume today).

Here’s why I think it’s forgivable. First, the rally in the stock over the past six weeks has been relentless. Before last week the stock only had four down days during the entire run. The recent selling was long overdue, so I don’t mind that there’s a fair bit of profit-taking.

Second, relative to the volume at the end of the previous rally (Aug 30th and 31st), the volume during the pullback has been smaller.

Implied volatility has officially returned to its pre-earnings level. The IV Rank is 64%. This means option premiums are now ripe for the selling. Only this time, we don’t have a binary event like earnings staring us in the face. And that makes this volatility ramp easier to exploit, or at least manage.

In building a bull put spread we could go out to October (39 days away) and sell a $200/$195 bull put spread for around 55 cents. The $200 strike has a delta of 16 which gives this spread an 84% probability of profit. One way you can think of the trade is as a bet that AAPL will bounce before descending all the way to $200. Given the strength of its uptrend, this is a high probability bet.

Now to the management. To elevate our odds of success, we can scale-in. Suppose we’re willing to sell three contracts. We could sell all three now, betting that AAPL will bottom today. Or, we could sell one now, but wait to see if AAPL ends up falling further before finally bouncing. The former approach will be best if you nailed the bottom and AAPL never falls further over the next month. The latter method will be best if AAPL drops toward $215, $210, or lower at some point over the duration of the trade.

Here’s how we might set it up:

Tier 1: Sell Oct $200/$195 bull put for 55 cents

Tier 2: Sell Oct $200/$195 bull put for 85 cents

Tier 3: Sell Oct $200/$195 bull put for $1.10

By scaling-in, we are using can use any adverse movement to our advantage. Think about how often you have a trade move into losing territory at some point between entry and exit. This tactic allows us to use that to our eventual benefit.

If today was the pivot day in AAPL and it never moves any lower then, GREAT! You’ll win on the first tier. But if it moves lower, then you can potentially enter a second and third tier at better prices.

I still suggest you wait for a trigger before pulling the trigger on the first tier. If AAPL continues to cascade lower on Monday and Tuesday then you might hold off on entering. Also, if it falls enough, you may be able to sell an Oct $195/$190 bull put for 50 cents or more. So at some point adjusting strikes will make sense.

The next step is to establish proper exit points. Rather than riding to expiration, I suggest bailing if you make an acceptable profit. Maybe something like this:

Tier 1: Sell Oct $200/$195 bull put for 55 cents. Exit at 15 cents. Profit 40 cents

Tier 2: Sell Oct $200/$195 bull put for 85 cents. Exit at 45 cents. Profit 40 cents

Tier 3: Sell Oct $200/$195 bull put for $1.10. Exit at 70 cents. Profit 40 cents

By scaling out, you will be able to peel off part of your position when AAPL rallies back. If you think about it, we are adding exposure into weakness and lightening up into strength. It’s a concept that everyone gives lip service to, but few actually execute well on.

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