Before I get started I wanted to invite all of you to my upcoming FREE webinar “How I Collect Monthly Income Using the S&P 500 ETF (SPY)”. I will also introduce the strategy behind my New Apple portfolio and the first trade. Seats are still available so reserve your spot now. If you are unable to attend, don’t worry, if you are on the list we will make sure to send you the recorded video.
If you’re like most investors, you probably missed the recent growth in Apple (NASDAQ: AAPL). Today, a lot of people are buying shares of Apple, hoping that the company will continue to see huge growth.
That’s not likely to happen.
Apple is one of the biggest success stories in corporate history. It grew an amazing 5000+% over the past nine years. If it grew another 5000%, it would be worth more than $29 trillion, or about twice the gross domestic product of the United States.
So if you think you’re going to see another 5000% gain, or anything like that from Apple, be prepared for disappointment.
The good news is you don’t need to buy shares of Apple to profit from future strength. In fact, since Apple is so big today – more than $500 billion market cap – it’s become a great vehicle for trading options.
Which is exactly what I’ve been successfully doing for the past few months …
How I Made 15.5% in Apple in Less than 24 Days
In my upcoming webinar this week (details below), I will discuss my Apple options strategy in plenty of detail. For now, though, I’d like to talk about the basic premise of the strategy.
Essentially, I’m able to manipulate the likelihood of the trade’s outcome. As I increase the probability of a winning trade (I call this my “probability of success”), my potential profits will decrease. It’s that simple … well, almost.
Let me illustrate using Apple.
As most of you know, Apple recently surged above $700. In doing so, the stock became very overbought. Due to this extreme overbought state, I believed the stock was well overdue for a pullback … at least in the short term.
Now that I had an assumption about the stock’s direction in place, I moved onto my strategy of choice – the bear call spread.
A bear call spread is a credit spread composed of a short call at a lower strike and a long call at a higher strike. The nature of call pricing structure tells us that the higher strike call we are buying will cost less than the money collected from the sale of a lower strike call. It is for this reason that this spread involves a cash inflow or credit to the trader/investor.
The ideal condition is for the spread to expire worthless, thus allowing you to keep the premium collected at the time of the sale of the spread. In order for this to happen, the underlying will have to close below the lower strike call option that you are short.
With Apple trading at $690, I wanted to choose a short (sold) strike for my bear call spread that met my risk/return objectives. I prefer a win rate/probability of success in the 80%-95% range. As such, I liked the Oct12 750/755 bear call spread. This means that I sold the 750 call and bought the 755 call. My objective was for Apple’s share price to remain below 750 through option expiration on October 19. That way, both options would expire worthless and I would keep the credit received when I initiated the trade.
I could have collected a higher premium if I sold a strike that was closer to the current price of Apple. But that would lower my probability of success. And don't forget, the ultimate goal is to increase your probability of success while taking on risk that allows for a return that is suitable for your income goals.
For this trade, I gave myself a nice margin for error, which increased the probability of success on my trade. Here, the 750 strike allowed for a $60 – or 8.7% – cushion. In other words, Apple could move up to 8.7% against my expectation and I would still reap the maximum gain on this trade. That’s the beauty of credit spreads – they allow you to profit even though you may be wrong on your analysis of the underlying stock.
At the time, the Oct12 AAPL 750/755 bear call spread brought in a credit of approximately $.67, or $67 per contract. This resulted in a maximum return of 15.5% and an 86.6% probability of success (I’ll explain how I arrived at those numbers in my webinar).
With a probability of success over 86%, I felt very good about the future success of the trade. Remember, if I have an 86% chance of winning, the guy on the other side has only a 14% chance. That’s basically pure speculation, something we want to avoid.
Several days after I mentioned the trade Apple began its latest decline. Seven days into the trade my Apple bear call spread was essentially worthless, meaning you could have taken of the trade for close to the max profit of 15.5%. If you had waited until the spread expired you would have made the entire 15.5%. It’s certainly not a bad way to bring in monthly income.
Introducing My New Apple Portfolio
Over the past several months, I have been using credit spreads to trade Apple. And so far I have had great success. Since May I have logged an average return of more than 13% per trade, with each trade lasting about a month.
In fact, because of this recent success, I have started a new Apple portfolio within the Options Advantage service.
While I’d love to go into great detail about the credit spread strategy here, I prefer to teach in a real-time environment. It’s a more practical and useful way to teach self-directed investors my step-by-step approach. Moreover, I’ll be giving away my first Apple trade as part of my upcoming FREE live webinar “How I Collect Monthly Income Using the S&P 500 ETF (SPY)”. Join me this Thursday, October 25th at 6 ET. Seats are still available so reserve your spot now. If you are unable to attend, don’t worry. If you signed up, we’ll make sure to send you the recorded video.
Editor and Chief Options Strategist