After a stunning 6 day, 13% rally off the Sept. 12 intraday low of $102.53, shares of Apple Inc. (NASDAQ:AAPL) are finally showing signs of fatigue. With the stock overbought and overloved, I expect Apple shares to have trouble moving significantly higher from the current $113.58 level.
On a longer-term basis, the stock has some overhead serious technical resistance at the $120 level. Apple stock is also getting overbought on a 9 day RSI basis. Previous instances when shares were this overbought proved to be short-term tops.
Click to Enlarge Looking at Apple’s shorter term, yesterday’s price action was also indicative of a top. Shares traded just past the $116 level, making a new recent high.
AAPL then reversed swiftly, selling off sharply to close both lower and on the lows of the day at $113.58. This type of is many times an indication that the trend is coming to an end.
Following the recent monster rally, shares of Apple Inc. are no longer trading at a discount to the overall market.
Click to Enlarge Looking at the NASDAQ OMX Alpha AAPL vs. SPY Index (INDEXNASDAQ:AVSPY), which measures the performance of Apple versus the SPDR S&P 500 ETF Trust (NYSEARCA:
SPY), one can see the recent relative out performance of AAPL stock to the S&P 500 Index.
Fundamentally, Apple stock is near its highest price-earnings ratio of the year. More importantly, AAPL stock is yielding just 2%, near the yearly low. With growth assuredly slowing, Apple’s dividend yield has become increasingly important.
The last time shares traded below 2% on a yield basis was mid-April, which marked a significant top in Apple stock. I look for the stock to have trouble piercing this 2% yield level with any conviction.
In a, J.P. Morgan analyst Rod Hall pointed to heavy discounting as a key factor in the strong launch of the iPhone 7. Mr. Hall also said he believed that the initial demand surge will borrow heavily from third quarter sales. With a $107 price target (but strangely an overweight rating), he certainly is less than ebullient on shares at current levels.
So with AAPL overbought and finally showing signs of slowing, a bear call spread seems to make sense.
AAPL Stock Options
Buy the Oct $123 calls and sell AAPL Oct $120 calls for a 34 cent net credit. These are the traditional monthly options that expire Oct. 21, before the earnings date of Oct. 25.
Maximum gain is $34 per spread and maximum risk is $266 per spread. Return on risk is 12.78%. I would look to close out the position on a meaningful break above the $120 resistance level, while letting the spread expire worthless if Apple stock remains well-behaved.
As of this writing, Tim Biggam did not hold a position in any of the aforementioned securities. Anyone interested in finding out more about option-based strategies or for a free trial of the can email Tim at tbiggam@deltaderivatives.com.
