Apple had a nice bounce Wednesday, closing up over 2% on higher volume. According to the IBD Stock Checkup, Apple stock is ranked No. 3 in its industry group. It has a Composite Rating of 59, an EPS Rating of 94 and a Relative Strength Rating of 26.
When it comes to options, we normally look at short-term trades — anywhere from one week to one month. Today, we will look at a longer-term bull put spread.
Longer-term option trades tend to move a little slower than shorter-term trades. That allows more time to adjust or close, but also means a lower annualized return.
As a reminder, a bull put spread is a defined-risk strategy, so you always know the worst-case scenario in advance.
Apple Stock Trade In Various Outcomes
This type of trade will profit if Apple trades sideways or higher and even sometimes if it trades slightly lower.
With Apple stock trading around 172, if we use the July 19 expiration, we can sell a 155 put and buy a 150 put to set up the bull put spread. That spread was trading around $0.75 early Thursday.
Selling this spread would generate roughly $75 in premium with a maximum risk of $425.
If the spread expires worthless that would be a 17.7% return in four months. That's provided Apple stock is above 155 at expiration.
The maximum loss would occur if Apple closes below 150 on July 19, which would see the premium seller lose $425 on the trade.
The break-even point for the trade is 154.25, which is calculated as 155 less the $0.75 option premium per contract.
Exit Strategy For Apple Option Trade
I would set an adjustment point or a stop loss if Apple stock drops below 160. Otherwise, another good rule of thumb is to limit the loss to the amount of premium received. In this case, that would be $75.
Sticking to this stop loss level will help avoid large losses if the trade goes south.
Please remember that options are risky, and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on X/Twitter at @OptiontradinIQ
