Play Apple Earnings With a 'Bull Call Spread' to Limit Your Risk

By:   Fedora Atjeh Fedora Atjeh   |   5/02/2018 02:46:00 PM
Play Apple Earnings With a 'Bull Call Spread' to Limit Your Risk
Play Apple Earnings With a 'Bull Call Spread' to Limit Your Risk

Are the best days behind for Apple (AAPL - Get Report) ? The very idea seemed silly just a few months ago, but many investors are asking that question as they await AAPL's earnings report Tuesday after the bell. So, I'm using a so-called "bull call spread" to play the stock ahead of earnings.

I expect that whatever Apple announces Tuesday afternoon, both the market's algorithms and retail investors' broad exposure to the stock means that we'll see an overreaction. Should this overreaction be negative, I'll buy the stock on a retest of its February lows that approached $150 a share.

However, that's not enough incentive to sell puts here. In fact, I think it's very possible that there'll be a positive overreaction instead of a negative one -- more likely based on what CEO Tim Cook says than on Apple's actual numbers. That's why I set up a bull call spread on AAPL on Monday, with an expiration date of this Friday.

For those of you unfamiliar with bull call spreads, they're an easy way to bet on a stock's direction while still controlling your risk. They're great for when you have an investment idea about a stock, but lack real conviction that you're correct.

Basically, a bull call spread involves going long on a stock using a call option while simultaneously going short on the same stock using a call option with a higher strike price than the first one. The difference between the two options' prices is called your "net debit." That's your maximum possible loss.

You'll make the maximum possible money on your bull call spread if the stock in question reaches a price at or above your long call option's strike price by the expiration date. In that case, your profit will be the difference between your two call options' strike prices minus your original net debit.

Here's the bull call spread that I set up Monday on Apple:
  • Long Call. I bought a $165 AAPL May 4 call, which cost me $4.12 per contract.
  • Short Call. I sold a $170 AAPL May 4 call, which got me $1.86 per contract.

My net debit on this trade is $2.26 per contract -- the $4.12 that I paid for my long call minus the $1.86 that I got for my short call. That's the most I can lose, and I'll only lose it Apple falls to $165 or lower by Friday, May 4. (AAPL is at $166.80 as I write this.)

Conversely, my maximum potential profit is $2.74 -- the $5 difference between the long call's $170 strike price and the short call's $165 strike price minus my $2.26 net debit. That's how much I'll make if Apple hits $170 or higher by Friday, May 4.

The only major downside to this strategy is that it limits not just your potential downside, but also your potential upside. But hey, there's no such thing as a free lunch, right?

Join Stephen Guilfoyle and Jim Cramer May 5 for TheStreet's Boot Camp for Investors


Meet Jim Cramer and more than a dozen top market experts on Saturday, May 5, in New York for How to Diversify Your Portfolio: A Boot Camp for Investors.

Highlights includes :
  • An exclusive market update from Jim.
  • A keynote interview between Jim and PayPal CEO Dan Schulman.
  • Break-out panels with top market experts like Tony Dwyer, chief market strategist at Canaccord Genuity; Mike Hanson, senior vice president of research at Fisher Investments; and Peter Hug, global trading director with Kitco Metals.
  • Roundtable discussions with TheStreet's Carley Garner, Stephen "Sarge" Guilfoyle, Bob Lang and other columnists.

All attendees will also receive a free one-year subscription to our newest premium Web site, Retirement Daily (a $99 value).

Where: The Convene Center, 117 W. 46th St., New York

When: Saturday, May 5, 8:55 a.m.-2:45 p.m.

Price: $199. Includes a free one-year subscription to Retirement Daily (a $99 value)

Source : thestreet

Show Comments