Late today I received a link to an article in Apple’s hometown paper the San Jose Mercury News –
Apple officially in ‘bear market’ after postelection sell-off
First off, I have never heard the term ‘Bear Market’ applied to a single stock, but I guess if there was ever a stock that could be referred to as its own market it would be Apple (AAPL – 558.00). When the article was written AAPL was trading down 21.1% from the all-time closing high price of 705.07. It was mentioned that in Wall Street speak a 10% drop is a correction and a 20% drop is a bear market. It was also mentioned that AAPL dropped 16% from highs this past spring (a correction I guess, but not bear market) before rebounding to achieve new highs. So if you have an opinion that a rebound is near or continued downside is on the horizon you may want to take a look at a vertical spread.
Vertical spreads are spreads that combines two options that are the same type and share an expiration date, but have different strike prices. One is sold and the other is purchased. An attractive feature of a vertical spread is that when the trade is initiated (bullish or bearish) the maximum risk is known. The potential reward is known as well. When considering taking a position on a stock like AAPL that might move 150 points over the course of a few weeks knowing the maximum risk and reward for a trade may give a trader some peace of mind.
Let’s say you are in the camp that believes the worst is behind AAPL and the stock will rebound over the next few weeks. Looking at December options the following spread might be considered –
Sell 1 AAPL Dec 555 Put at 22.00 + Buy 1 AAPL Dec 545 Put at 17.75 which would result in a net credit of 4.25. As long as AAPL is over 555.00 at December expiration the both options will expire out of the money and the result would be a profit equal to the 4.25 credit taken in when the spread is initiated. The worst case scenario here is that AAPL continues the current downtrend and the stock is under 545.00 at December expiration. In this case the short position would be worth 10.00 more than the long option position. Subtracting out the credit received means the loss on the trade would be 5.75.
Let’s say you are in the camp that believes the bear market in AAPL will continue. Well there’s a conservative vertical spread available for you as well –
Sell 1 AAPL 560 Call at 23.10 and buy 1 AAPL 570 Call @ 18.70 for a credit of 4.40. In this case the maximum profit is the 4.40 credit received and as long as AAPL is under 560.00 at December expiration this will be the outcome. The worst case scenario for this trade is AAPL turns around and is above 570.00 at December expiration. In this case the loss would be capped 5.60, even if AAPL returns to the 700’s.
These two examples are just illustrations of a low risk way to trade your personal opinion on where AAPL shares are going over the next few weeks. With several AAPL expiration series out there and 100’s of individual options listed on AAPL the alternatives based on your personal opinion of AAPL stock are unlimited. Personally, I like the idea of knowing my maximum risk when going into a trade, especially when considering a trade on a stock that has moved 150 points in just over 6 weeks.