You don't get to the size of a company like Apple (AAPL) without painting a bulls-eye on your back. After the close on Monday, that bulls-eye fell into the crosshairs of President Trump.
Apple was put on notice that possible tariffs on iPhones and other Apple products from China could be on the horizon due to the ongoing trade war with China. The obvious answer to this problem, that the White House wants to see, is those products coming stateside bringing jobs along with the production. Unfortunately, the cost to Apple, and ultimately the consumer, for products made outside of China may very well exceed the 10% tariff level. Heck, it may exceed the 25% level.
If I were in the Oval Office, my end game here would be a deal where I exclude Apple from the tariffs in exchange for the company repatriating cash from overseas, billions of dollars, perhaps including a very favorable tax rate to do so. I doubt we'll see that, but it would be a best-case scenario, in my view, for all parties involved, including the consumer. Add into all this mess, the Supreme Court review of a lawsuit relating to whether consumers who buy apps from Apple have the right to sue Apple, and you realize the target on Apple is growing larger by the day.
Despite these recent events, the stock is holding up well the past few days. The concept is relative, though. If you were a buyer in the $220 to $230 range, then a 20%+ haircut doesn't hold up well. Eventually, I believe these headwinds will subside, and we'll see Apple find interest from buyers, but it will take some time.
I recently outlined an AAPL iron condor trade, but another approach here with this thesis in mind is a calendar spread or diagonal spread depending on your risk tolerance and view of the stock.
I favor more of a diagonal spread here believing the stock can rise, but that it won't go too far too fast. I do think that any near-term bounce (two months), will be capped at $200. Round-numbers tend to play in trader's minds whether they warrant it or not.
The Trade:
-- Buy to open 1 AAPL March 15, 2019, $210 at $1.80.
-- Sell to open 1 January 18, 2019, $200 call at $1.00
Net Cost: $80
Max Risk: $1,080
Max Reward: Unlimited after Jan. 18 if the short call expires worthless
Days Until Expiration: 52 & 108
The thinking here is the stock won't close above $200 before January expiration. With twice as many days on the long position, even if the stock runs to $200 or $205 come January expiration, the time value of the March call should be enough to offset any loss on the short call.
I would not short calls without an offsetting long position as I prefer defined risk in this market environment.
(Tim Collins is a regular contributor to Real Money Pro. Click here to learn about this dynamic market information service for active traders and to receive columns from Tim Collins, Paul Price, Bret Jensen and others.)
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