Is it Treason to Short Apple?

It seems like Apple (NASDAQ:AAPL) has replaced the Dallas Cowboys as “America’s team.” And yes, I know it is a great stock – one that might actually be undervalued. But at the risk of sounding almost un-American, I think it’s time to start getting short AAPL.

Sure, the company just announced record – heck, downright mind-blowing – earnings thanks to iPhone 4S, iPad 2 and international sales. Even Wall Street analysts were impressed with the final numbers.

Unprecedented sales figures for the company aside, I’m a trader and, therefore, looking ahead to what the stock’s going to do next. With all the good news for the company, the stock has been climbing … but it can’t possibly go straight up without any down days.

In other words, even AAPL has to have a few days or weeks to act “human” … and you should get positioned to profit from the pullback when it comes.

As a trader, I am not concerned about AAPL long term. But here in the short- to intermediate-term, it’s quite reasonable and even wise to look for a little healthy downside trading action. Here’s a trade idea for the speculative part of my options portfolio.

Trade Idea: With AAPL trading here around $447, you can “buy to open” 1 April 430 Put (which would cost you about $12) and, at the same time, “sell to open” 1 April 410 Put (for which you would collect $7).

To enter this trade, which is a put debit spread (or a bear-put spread), your total cash outlay would be $5 per share, or $500 per option contract ($12 – $7 x 100).

You could simply buy the April 430 Put on its own, but by selling the $410 put against it, you instantly reduce the amount of money you would otherwise have at risk in the trade.

The spread is costing me $500 and the most I can make is $15 (the difference between the option strikes, or $430 – $410) if the stock is trading at $410 or lower at April expiration.

My total risk in a put debit (or bear-put) spread is the same as being long an option. Whatever I pay, which is $500 in this example, that’s the total risk. The cost of the spread at current prices is closer to $5.30, but I am going to be patient and let it come to me a bit. If the stock goes up a couple bucks from here, I should get filled.

Last week when I told you that it’s time to get a bit short, I also mentioned that you should enter your options trades by “nibbling,” or scaling in by buying your position in thirds.

Here, too, I am initiating this spread with 1/3 of my total intended position size. I am starting with one contract here and will work up to my total of three contracts as the stock increases.

Will I wait till April options expiration to get out of this? No way! Once we get a little pullback and the put spread gains some profits, I’ll head for the exits.

I’d like to make a minimum of $2 on this spread. By getting in at a good price, by scaling into the spread at less than my maximum size, and by using options with an April expiration date, I have lots of time to wait for a small pullback. That’s my plan and I’m sticking to it!

If, after I get up to three contracts and there is no pullback, I plan to show you in a future article how you can cut your total risk in half. (Hopefully, I won’t have to show you this adjustment as anything other than a strategy that’s good to know for future trades.)

Whatever happens, I will follow this trade to completion with you. Stay tuned to see if AAPL is really human. I’m betting it is!

And please see our options trading for beginners page.