Apple (AAPL), like most stocks, has been on volatile ride lately bouncing up and down between 170 and 215.
However, the options market could be indicating that the stock might settle around the 215 mark over the next few weeks.
This is due to a theory called Max Pain and is something I talked about in a video for Barchart.
The Max Pain Theory claims that as option expiration approaches, stock prices will get pushed toward the price at which the greatest number of options in terms of dollar value will expire worthless.
Large institutions are generally net sellers of options, so they will benefit the most from options expiring worthless, or with the lowest net value.
We can use Barchart to find the Max Pain level quickly and easily for any stock and expiration.
Here we can see that the Max Pain level for AAPL on May 16th is right around 210.
What can we do with this information?
Well, if we think that the Max Pain theory might play out this month, we could look to trade a butterfly spread centred at the 210 strike.
Let’s take a look at how that trade idea might be structured.
AAPL MAX PAIN BUTTERFLY SPREAD
A butterfly spread is constructed by buying a lower strike put, selling two middle strike puts and buying one upper strike put. The trade is entered for a net debit meaning the trader pays to enter the trade. This debit is also the maximum possible loss.
The maximum profit is calculated as the difference between the short and long puts less the premium that you paid for the spread.
Using the May 16 expiry, the trade would involve buying the $200 strike put, selling two of the $210 strike puts and buying one of the $220 strike put.
The cost for the trade would be around $180 which is the most the trade could lose. The maximum potential gain is around $830.
AAPL COMPANY DETAILS
The Barchart Technical Opinion rating is an 88% Sell with a Strongest short term outlook on maintaining the current direction.
AAPL rates as a Strong Buy according to 18 analysts with 4 Moderate Buy, 12 Hold ratings and 2 Strong Sell ratings.
Implied volatility is 43.64% which gives AAPL an IV Percentile of 97% and an IV Rank of 56.20%
Apple's business primarily runs around its flagship iPhone.
However, the Services portfolio that includes cloud services, App store, Apple Music, AppleCare, Apple Pay & licensing and other services which become the cash cow.
Moreover, non-iPhone devices like Apple Watch and AirPod have gained significant traction. In fact, Apple dominates the Wearables and Hearables markets due to the growing adoption of Watch and AirPods.
Solid uptake of Apple Watch also helps Apple to strengthen its presence in the personal health monitoring space.
Apple also designs, manufactures and sells iPad, MacBookand HomePod.
These devices are powered by software applications including iOS, macOS, watchOS and tvOS operating systems.
Apple's other services include subscription-based Apple News, Apple Card, Apple Arcade, new Apple TV app, Apple TV channels and Apple TV, a new subscription service.
Conclusion And Risk Management
Short-term trades such as this one are difficult to adjust. Either the trade works, or it doesn’t so position sizing is vital.
Short-term trades also have assignment risk, so traders need to be aware of that possibility.
Please 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.
