Apple (AAPL) stock has had an impressive few weeks, rising from 138 to 175 despite broad market weakness.
Today, we’ll look at an advanced option strategy called a diagonal call spread. The strategy offers a profit if Apple pauses or pulls back after its recent rally.
This option strategy is an advanced strategy because it utilizes options over different expiration periods and different strike prices.
Let’s look at an example:
The trade I’m looking at is selling a Jan. 21-expiring put with a strike price of 160 and buying a Feb. 18 put with a strike price of 150.
As of Wednesday’s close, the Jan. 21 put could be sold for around $2.10 and the Feb. 18 put could be bought for $2.25.
The net cost on the trade would be $15, and that is the most the trade could lose on the upside.
The risk on the trade is on the downside with a potential maximum loss of $1,015. You calculate this by taking the difference in the spread (10) multiplied by 100 and adding in the cost of the trade (15).
Potential Gain Of $240 On Spread
The maximum potential gain is around $240, which would occur if AAPL closes right at 160 on Jan. 21.
The trade has a nice profit zone between 157 and 180.
Aiming for a return of around 7% to 10% makes sense, and I would set a similar stop loss.
The worst-case scenario would be a sharp drop in Apple stock early in the trade. For this reason, if the stock drops below 160 I would also consider closing the trade early to minimize losses.
The initial trade set up has a delta of 4, meaning the position is roughly equivalent to owning four shares of Apple stock. Note that this delta number can change significantly as the stock starts to move.
An Apple stock call ratio spread from a few months ago performed well and can be closed for a profit.
Apple Stock Ranks No. 1 In Its Group
Apple stock is ranked No. 1 in its group and has a Composite Rating of 97, an EPS Rating of 96 and a Relative Strength Rating of 92.
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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