With all the bullishness surrounding large-caps these days, you would think the largest of all the caps would be having a hey-day. Even with today’s give-back, the S&P 500 is still up 6.7% year-to-date in one of its best starts in decades. Mr. Market is frothier than a root beer float. Here’s a head-smacking stat for you: Monday’s 0.67% drop in the S&P 500, mild though it was, was the worst one-day drop since September 5th, 2017. According to Ryan Detrick, the slide ended a streak of 99 days in a row without a 0.6% loss. It was the longest such streak ever.
And yet, amid such a rousing rocketship rise, Apple, the biggest company on the planet, has fallen almost seven days straight. Since peaking at $180.10, the maker of all i-Things has shed 6.7%. That’s some serious relative weakness, friends. On the bright side, support looms large at $166 suggesting buyers may be close to fighting back. Meanwhile, the implied volatility has shot to the mean driving the IV Rank smack into 100%. Option premiums are officially juiced, and fear is in the air. On the volume front, participation is on the rise. It’s a crescendo with more and more Nervous-Nellies stabbing the panic button.
Adding further excitement to the saga is the upcoming earnings release slated for Thursday after hours. We’re about to see if all this distribution is warranted or merely a ruse. Throw it all together, and we have an interesting setup here. I think the play is obvious. Fade the fear with a bull put spread. Due to the high IV, you’re able to move pretty far out-of-the-money. And even if the stock does get hit on disappointing earnings it’s already fallen a fair bit in anticipation, so perhaps some of the bad news is already priced-in.
Moreover, to further increase the odds we could scale-in. That is, enter a partial position before earnings and if AAPL gaps lower we can open the second half at a better price. Here’s an example. Suppose you’re willing to bet Apple stock remains above $150 between now and March expiration. To provide context, a drop to $150 would translate into a 16.7% correction from AAPL’s recent all-time high. If you think such a move is unlikely you could sell the March $150/$145 bull put spread for 58 cents.
Let’s say your risk rules allow you to sell four contracts total. If you want to scale-in you could sell two now or, really, once AAPL pivots and turns higher. If it’s going to drop a few more days, you might as well wait on pulling the trigger. And then, after earnings, if AAPL falls further you could sell the other two contracts, ideally at a higher price like 88 cents to $1.16.
Then, hold out and hope that AAPL recovers before plunging below $150.
The circumstances surrounding Apple shares provides an insightful case study on how an oversold stock and high implied volatility can combine to create an attractive opportunity for premium selling.
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