Apple is showing implied volatility at 28.7%, which is higher than normal for this stock. Option traders can take advantage of that high volatility by selling a short strangle.
A short strangle involves selling an out-of-the-money put and an out-of-the-money call within the same expiration date. This trade generates a large amount of premium for the option seller, but it does come with risks.
A short strangle is an unprotected trade, sometimes referred to as a "naked" trade. Naked options can be risky as they expose the trader to potentially unlimited losses if the stock makes a big move.
However, if the trader is right and the stock trades sideways, the trader gets to keep the full premium.
Selling The Put And Call On Apple Stock
Here's how it works. Assuming a trader believes that Apple stock will trade sideways over the next few weeks, they could look to sell a June 20 put at 190 and a June 20 call at 215. The 190-strike put could be sold for around $1.30 a share and the 215-strike call could be sold for around $1.10 a share this morning.
Selling those two options generates a total of $240 in premium. That is the maximum possible gain on the trade if Apple stock closes between 190 and 215 on the day of expiration.
To work out the break-even price of the trade, take the lower strike price of 190 minus the total premium received of $2.40 a share, which gives 187.60. That break-even price is below recent support levels.
Then on the call side, take the call strike and add the premium which gives 217.40. The upside break-even price is above recent resistance.
The Short Strangle: Beware Of Unlimited Losses
This trade is a short vega trade, which means if implied volatility increases early in the trade, losses could occur. Short strangles are an advanced option strategy, so if all that sounds confusing, it's best not to trade them.
With a trade like this the potential losses are unlimited and a lot higher than the potential gains, so traders would want to be very confident that the stock is going to remain flat over the course of the trade. A stop-loss could be placed at the short strike prices.
According to the IBD Stock Checkup, Apple stock ranks fourth in its group and has a Composite Rating of 58, an EPS Rating of 85 and a Relative Strength Rating of 25. Apple reported earnings on May 1, so this trade should have no earnings risk.
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, and is conservative in his style. He also believes patience in waiting for the best setups is the key to successful trading. Follow him on X/Twitter at @OptiontradinIQ.
