AAPL Contrarian Options Trade Pays Big

Thursdays 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 traders 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. Thursdays 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 AAPLs 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 Thursdays close Sell 1 AAPL Nov 26 300 Weekly Put – $1.47 /
contract based on Thursdays 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
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