AAPL Contrarian Options Trade Pays Big

Thursday’s price action in the S&P 500 offers a great example of the power of options, which are traditionally overlooked by most equity traders or investors. While I did not personally enter this trade, I did enter a short position with tight stops around the S&P 1,197 level using futures contracts for a short-term trade. I was looking for a short-term decline, which we subsequently received in the aftermarket and my limit orders were triggered. The option trade that I discussed with one of my trading buddies and mentor, involved getting short Apple Inc. (NASDAQ: AAPL ) when its price was around $309.50 a share. While I did not place this trade as I felt I had plenty of short-side exposure via my e-mini futures position, the trade would have worked quite well. So the trade listed below is not a recommendation, but an illustration of how options can be a contrarian trader’s best friend. The Contrarian Trade AAPL has been trading in the $300 – $320 per share range for several weeks having broken out above $320 only to be smacked down into the range. During the recent sell-off, AAPL crossed down through the $300 level only to encounter strong buying that pushed it above the key $300 area by the close of trade that day. Thursday’s rally had AAPL trading above $309.50 a share and the 20-period moving average was right around the $310 level, as can be seen from the chart below. The 20-period moving average provides an adept option trader with a key level, which he/she can define the risk of a short position using options. Through the utilization of a contingent stop based on AAPL’s stock price, a trader using this setup could place a stop around the $311.25 area to define their ultimate risk. As of Thursday, the AAPL weekly options that expire Nov. 26 began trading. The trade listed below is a put debit spread : Buy 1 AAPL Nov 26 310 Weekly Put – $5 / contract based on Thursday’s close Sell 1 AAPL Nov 26 300 Weekly Put – $1.47 / contract based on Thursday’s close AAPL stock closed around $308.43 / share The profitability chart reflecting this trade is below: The maximum risk this trade has per leg was around $350; however, through the use of the contingent stop around $311.25, the risk per leg is around $150. The maximum gain would be $650 per leg if at expiration in one week AAPL was trading below $300 a share. In the first hour of trading, AAPL sold off below $306 per share. If an option trader had more than one contract on, he/she could take partial profits and place a stop at the entry price insuring a winning trade and allowing room for the trade to run. Obviously the trader may want to adjust his/her stop based on market conditions, but this is simply an example of what can be accomplished with options. Once the trader understands how to determine the risk that an option trade assumes, he/she can build trade constructions to fit nearly any trading style or strategy. For a contrarian trader, options offer an unbelievable opportunity to mitigate risk and maximize profits. Learning how to trade options does take time and effort, but the potential returns options offer when they are used appropriately are unparalleled. If you would like to receive my Free Options Strategy Guide & Trade Ideas, join this free newsletter .
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