Apple stock had a bullish close on Friday and is holding above the all-important 200-day moving average.
Implied volatility on Apple stock is 21.6%, which is the lowest level we've seen in the last 12 months. That means options are cheap compared with the previous 12 months.
A Way To Trade Apple From Long Side
When that occurs, it's better to be a net buyer of options rather than a seller.
And one way to trade the stock from the long side in a defined risk way is using an option strategy known as a bull call spread.
One way to create a bull call spread is through buying a call and then selling a further out-of-the-money call.
Additionally, selling the further out-of-the-money call reduces the cost of the trade but also limits the upside.
Going out to August expiration, a 130-strike price call option was trading around $4 on Friday, and the 140 call was around $1.45
Buying the 130 call and selling the 140 call would create a bull call spread. The cost of the trade would be $255 (difference in the option prices multiplied by 100) and the maximum profit potential would be $745 (difference in strike prices, multiplied by 100 less the premium paid).
Bull Call Spread A Defined Risk Strategy
A bull call spread is a defined risk strategy, so if Apple stock closes below 130 on Aug. 20, the most the trade could lose is the roughly $255 premium paid.
Meanwhile, potential gains are also capped above the 140 stock price, so no matter how high Apple stock might go, the most the trade could profit is $745.
Trading a bull call spread can be an easier way for smaller traders to gain a bullish exposure to AAPL stock using options.
In terms of trade management, if the spread dropped from $2.55 to $1.20, or if the stock dropped below 122, I would consider closing early for a loss. Otherwise, I would hold to expiry.
Keep Risk In Mind
Apple stock is showing a Composite Rating of 71, an EPS Rating of 94 and a Relative Strength Rating of 44.
Apple earnings are set for around the end of July, so there would be earnings risk with this Apple stock trade.
Also, it's important to 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 Twitter at @OptiontradinIQ
