Apple stock broke out above recent highs yesterday, finishing with an impressive 5% gain. A bull call spread could be an option play to participate in upside while limiting your risk.
Leading Action By Apple Stock
Apple (AAPL) is ranked No. 1 in the Telecom-Consumer Products group with a Composite Rating of 88, an EPS Rating of 81 and an RS Rating of 83. Its strong fundamental and technical action earned it a spot on the IBD Leaderboard leaders list.
In the previous few weeks Apple stock has beautifully retested the 21-day moving average and looks primed for the next leg of the rally.
AAPL reports earnings on Jan. 28. Many times we will see strong stocks such as Apple stock rally into the earnings date on the expectation of positive news.
While there is no guarantee that will happen this time, a bull call spread is an easy, risk-defined strategy that will benefit from further upside in the stock.
Bull Call Spread Option Play
A bull call spread strategy starts with buying a call and then selling a further out-of-the-money call with the same expiration date.
Selling the further out-of-the-money call reduces the cost of the trade but also limits the upside.
Going out to the February expiration, a 130 strike call option traded yesterday around $7.25 and a 135 call was around $5.40.
Buying the 130 call and selling the 100 call would create a bull call spread. The cost of the trade, at those prices, is $185 and the maximum profit potential is $315 (difference in strike prices less the premium paid).
Profit And Loss Goals For Apple Stock
A bull call spread is a risk-defined strategy. If AAPL stock closes below 130 on Feb. 19, the trade loses the roughly $185 premium paid.
But there is also a limit on potential gains once the stock gets above 135. No matter how high Apple stock goes, the most the trade profits is $315. That’s still a 70% return in just two months.
Trading a bull call spread can be an easier way for smaller traders to gain bullish exposure to AAPL stock using options.
In terms of trade management, if the spread dropped from $1.85 to 90 cents I would consider closing early for a loss. Otherwise I would hold to expiry.
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. Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on Twitter at @OptiontradinIQ
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