Apple at 'Rest'
Apple (AAPL) is taking a little "rest." I've found "rest" to be the kinder, gentler way to refer to a stock you hold that is down on the day. I believe George Carlin would compare this to changing "shellshock" to "post-traumatic stress disorder." With "resting," there shouldn't be any downside, simply a wait -- for the stock to get up and go when it is done "resting." The stock should be energized and revitalized, ready to charge higher and break through resistance like a conquering hero defeating an unseen enemy -- a bad enemy because there was resistance. And then it may rest again, on support levels, no less, until it's ready to press forward again.
AAPL has done very little "resting" so far this year, but the first week of a new quarter may be a good time. This is also the time where I like to mix some long monthly option spreads with short weekly option spreads. Since there will be three weeks until expiration for the monthly options, my strategy is to look for the weekly spreads to expire so that I can keep the premium while still holding the long monthly spreads. Then I will look to repeat the short spreads again next Friday or simply hedge my long position.
I am going long call and put combinations both in a long 2 by short 3 by long 1 format. On the call side, I am using April 20 $615-$630-$640 call legs. For the puts, I'm using April 20 $590-$575-$565 put legs. Against these positions, I will short two bearish call spreads and bullish put spreads each. Therefore, I am shorting two April 5 $615-$620 call spreads and two April 5 $585-$580 put spreads. Note that these short spreads expire next Friday while the long positions do not expire for three weeks. The price has been jumping around on this trade, but my target is to get it as close to $11 as possible, although I expect I may have to go a few nickels above that.
The worst-case scenario would be for AAPL to drop to $580 or rise to $620, the short spreads to lose their maximum value, me to do nothing with the trade, then see AAPL settle between $590 and $615 come April monthly expiration. This is certainly possible, which would result in a loss of the $11 trade premium plus $10 on the short spreads; however, the part about doing nothing and just watching the position is unlikely.
If AAPL plummets or skyrockets, then the max loss on the short spreads of $10 would be realized, but the long positions would likely move to the $15 or higher area, depending on exactly where AAPL goes, so while I would be looking at a potential loss, it would be close to $6 rather than $21. I would still have time to work with the trade, so unless AAPL has an extremely large move in one week, I feel as though I am risking no more than $5 net on this trade. The current best-case scenario is $30 if the short spreads expire worthless, then AAPL closes on April 20 at $630 or $575. I view this as unlikely, but it too is possible.
My target for the trade is $20, but I will start small into the weekend and see how the market looks on Monday before expanding.
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At the time of publication, Collins was long AAPL combinations.