Apple (AAPL) is showing good relative strength and recently broke back above the 200-day moving average.
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AAPL is rated a Weak Buy and The Barchart Technical Opinion rating is an 8% Buy with weakening short term outlook on maintaining the current direction.
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Rather than just buying the stock, savvy traders can use the options market to find smart ways to trade Apple stock without risking too much capital.
Today, we’re going to look at a couple of bull call spread trades on Apple stock.
Here are the parameters for finding some bull call spread trade ideas on AAPL.
・Symbol equals Apple
・Break Even Probability above 40%
・Moneyness -10% to 0%
・Days to expiration 30 to 150
Here are the results of that particular screener:
© Barchart
Let’s analyze some of these ideas.
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Bull Call Spread 1: June 155 – 160 Bull Call Spread
As a reminder, A bull call spread is a bullish defined risk option strategy. To execute a bull call spread an investor would buy a call option and then sell a further out-of-the-money call.
Let’s use the first line item as an example. This bull call spread trade involves buying the June expiry 155 strike call and selling the 160 strike call.
Buying this spread costs around $2.65 or $265 per contract. That is also the maximum possible loss on the trade. The maximum potential gain can be calculated by taking the spread width, less the premium paid and multiplying by 100. That give us:
5 – 2.65 x 100 = $245.
If we take the maximum gain divided by the maximum loss, we see the trade has a return potential of 88.68%.
The probability of the trade being successful is 45.5%, although this is just an estimate and does not indicate the probability of achieving the maximum profit.
The spread will achieve the maximum profit if AAPL closes above 160 on June 16. The maximum loss will occur if AAPL closes below 155 on June 16, which would see the trader lose the $265 premium on the trade.
The breakeven point for the Bull Call Spread is 157.65 which is calculated as 155 plus the $2.65 option premium per contract.
Bull Call Spread 2: June 155 – 165 Bull call Spread
The next example involves buying the 155 June call and selling the 165 call.
Buying this spread costs around $4.85 or $485 per contract. That is also the maximum possible loss on the trade. The maximum potential gain can be calculated by taking the spread width, less the premium paid and multiplying by 100. That give us:
10 – 4.85 x 100 = $515.
If we take the maximum gain divided by the maximum loss, we see the trade has a return potential of 106.19%.
The probability of the trade being successful is 42.3%, although this is just an estimate and does not indicate the probability of achieving the maximum profit.
Mitigating Risk
With any option trade, it’s important to have a plan in place on how you will manage the trade if it moves against you.
For a bull call spread, setting a stop loss of 50% of the premium paid is a good idea. In the first AAPL example above, that would be a loss of around $130. For the second example, the stop loss would be around $240.
Traders may also consider a stop loss if AAPL breaks below the 200-day moving average, currently around 147.
Apple is due to report earnings in early May, so some traders my prefer to close the trades before then.
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.
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On the date of publication, Gavin McMaster did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.