A bearish options trade on Apple that wins if the buyback enthusiasm fades

Apple surged on Friday following Tim Cook’s announcement of the largest stock buyback in stock market history. However, we can’t overlook the fact that Apple’s revenue dipped by 4% year-over-year, with iPhone revenue down by 10%. While stock buybacks typically buoy stock prices, without substantial innovation and revenue growth, the initial post-earnings rally is likely to be short-lived, potentially giving way to profit-taking in the short term. Here’s how to play it with options. I’m aiming for a post-earnings “gap fill” trade on AAPL . Looking at the chart, there’s a noticeable gap between the $175 and the $185 price levels stemming from the earnings spike. Despite the broader market positivity on Friday and Monday, AAPL is exhibiting weakness, evident in its pattern of lower highs, lower lows, and a downward-curving Relative Strength Index, suggesting a waning upward momentum. Despite my long-term bullish outlook on AAPL, I’m considering a short-term bearish trade to fade this post-earnings spike. The Trade As of now, AAPL is trading at $483. To set up my bear put spread, I’m wrapping my strikes around the current price. This entails purchasing one put in-the-money, specifically the $485 put, and simultaneously selling the second put out-of-the-money, the $480 put. Combining these two puts as a single unit creates the vertical spread essential for this strategy. Here is my exact trade setup: Buy $485 put, May 17th expiry Sell $480 put, May 17th expiry Cost: $250 If AAPL is trading at $480 or below on the expiration date, this trade will double my money, providing a 100% return on investment on the money invested. To maintain a positive expectancy in any trading system, it’s crucial to ensure that your winning trades outweigh your losing ones. If AAPL starts against me, I would want to close the trade if I lose 50% of my investment (i.e., $125). By following this rule, every winning trade will offset two losing trades, helping to maintain a positive balance. This approach aims to optimize gains and mitigate losses effectively. -Nishant Pant Founder: Author: Mean Reversion Trading Twitter: @TheMeanTrader DISCLOSURES: (Nishant has a 185-180 Bear Put spread on AAPL expiring on 5/17/24) THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL’S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.