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Go Long Apple Inc. Into Earnings for Free

Last week ended with a bang for the mega-cap stocks like Apple Inc. (NASDAQ:AAPL). The bulls on Wall Street rejoiced from the Thursday earnings that Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) and Amazon.com, Inc. (NASDAQ:AMZN) delivered. These two delivered astounding stats that promised much more upside potential ahead.

In sympathy, AAPL stock rallied almost 4% in anticipation of its earnings, which are due out this week. Though the reactions last week were inspiring, they are not guarantees of similar results this week.

I believe that the short-term reaction to the earnings event is a complete coin flip. Regardless of the quality of the quarter, we don’t know what management will say nor do we know how traders will react. Case in point, Baidu Inc (ADR) (NASDAQ:BIDU) reported a great quarter and the stock fell 7% yet General Electric Company (NYSE:GE) delivered a stinker and the stock flipped from -6% to +2% that day.

Long term, fundamentals will eventual prevail but when trading options, time is a luxury that is fleeting.

Today, I want to bet on the long-term viability of AAPL. This is the cream of the crop when it comes to corporations. It sells out of every widget it produces and it has a loyal clientele that doesn’t mind over paying for the perceived superiority of its products. They self-admit that they are stuck in the Apple ecosystem. I personally don’t get it, but it works for AAPL.

In spite of my optimism for the stock here, I remain outspokenly critical of Tim Cook. I think he will ruin this gem of a company if he doesn’t change his way. The Long-term debt to equity is headed in the wrong direction, which I don’t mind if the money is being used in growth instead of financial engineering. I think shareholders will be better off if Cook would invested in new ventures. It is my personal opinion that GOOGL and AMZN both are setting their future prospects better than Tim Cook. They both have several new ventures that will be massive cash cows soon.

Having said, my trade today is bullish. My beef with Cook doesn’t mean I think trouble is imminent. Luckily for AAPL investors, the company is a giant boulder and will take years to stop even if rolling uphill. So I know that there is tangible value in AAPL stock. Its balance sheet is solid and its income streams from the iPhone is of amazonian proportions. Massive flow of cash to sustain it on its path.


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This is not the same as betting on the upside potential. I am merely creating income for the next few months betting that there is mathematical support below the stock.

Furthermore, I know that if it falls, famed investor Warren Buffet and the company buyback programs will defend my positions. If I cannot risk bullish money on Apple stock in this uber-bullish market, then I should not be investing.

The Trade: Sell the AAPL June 2018 $130 naked put. This is a bullish trade where I collect $2.50 to open. Here I have a 85% theoretical chance of success. But if the price falls below my strike then I accrue losses below $127.50.

Selling naked puts is daunting, especially in markets near all-time highs. Those who want to mitigate that risk can sell spreads instead.

The Alternate Trade: Sell AAPL June 2018 $130/$125 credit put spread. The spread has the same odds but would deliver 15% yield on risk. Neither trade require a rally to profit.

Ultimately, regardless of how careful I am, investing in stocks is fraught with danger, so I never risk more than I am willing to lose

Get my newsletter for free here. Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on twitter and stocktwits.


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