Apple stock is rated number one in the Telecom-Consumer Products Group and just broke out above the 50-day moving average.
Yesterday, call buyers outpaced put buyers by a ratio of two to one which could be seen as a bullish sign.
Apple (AAPL) is a popular stock, but is only showing a Composite Rating of 72, an EPS Rating of 84 and an RS Rating of 58.
The stock is currently 10% below its 52-week high.
Apple Stock Call Options
Traders thinking the rally in Apple stock will resume shortly can look at buying call options as a speculative play.
A call option is a contract between a buyer and seller. The contract gives the buyer the right to purchase a certain stock at a certain price (strike price), up until a certain date (expiration date).
One of the benefits of call options is that they provide leverage (this can be both a good and a bad thing).
Assuming an investor wanted to buy 100 shares of Apple stock, they would have to invest around $12,800 at the current price.
Instead, the investor could gain a similar exposure using a fraction of the capital by buying a call option.
One call option gives the investor exposure to 100 shares of Apple stock.
If an investor were to buy one Apple 100 call option expiring in June 2021, they would only need to invest around $3,650 rather than $12,800. If Apple stock goes to $0, the investor loses only $3,650 while still maintaining a similar exposure to the gains.
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The Apple 100 call option gives the investor the right to buy 100 AAPL shares at 100 up until the expiration date.
Call Option Cost: $36.50
The call option costs around $36.50 so the investor would need Apple stock to rise above 136.50 (strike price plus premium paid) to be profitable on the investment.
There is always a risk with trading on leverage like this of course, and if Apple drops below 100 at expiry, the investor would lose 100% of the investment, which is the $3,650. An investor holding 100 shares on the other hand would lose around $2,800.
Long call options can be a great way to gain exposure to a stock without risking as much capital as would be required to buy the stock outright.
However, it’s important to 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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