On 1-June-2019, we suggested investors buy a risk reversal as a way of taking a bullish position in Apple Inc. We, of course, were bullish at the time and thought the 19% selloff from it’s all-time what was a bit overdone.
When we placed the trade, Apple was trading at $175.07. AAPL closed Monday’s days trading at $198.58. The following exhibits show the original structure and the risk analysis showing the total return analysis given a change in the price fo the underlying.
Now that AAPL is trading sharply higher, this trade can be closed for $10.03, delivering a profit of $990 on the trade.
You might be asking, “Why should one terminate a trade now when the trend looks good?” The reason is that (1) the overall equity market is stalling out after an out of a nowhere bull move. (2) The rally in AAPL may be a correction of a larger selloff as the RSI and MACD are rolling over. (3) Until proven otherwise, the trend is mildly down in AAPL stock. (4) The trade issues, while put aside for the moment by investors, effect AAPL as they source phones from a manufacturer located in China. (5) The price of AAPL stock is sitting just above the call strike which is where time decay is at its highest. So if the stock does not move, the profits in hand could vanish over time.
We are not expecting any progress in talks between the Presidents of the 2 countries. China’s demand for the US to eliminate tariffs before serious negotiations commence simply will not happen. Ultimately, China will not engage in serious negotiations until after the elections. They are hoping a Democrat will win the Presidential election and once in power, they will fold like that have done in the past. Once investors come to understand this fact, we think a larger selloff will follow.
