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Be Greedy for Apple While Others Tremble

After ECN liquidity rebates (I place limit orders for others to trade against), my commissions are essentially free. I can trade 10 times as many shares of a $40 stock back and forth for only pennies as I can with Apple. If you're Goldman Sachs you can trade Apple all day long, but I will take a position selectively if I want to swing trade it or capture option premium.

That is where I am now with Apple. I believe Apple is an excellent candidate to sell put options against further price weakness. If it goes against me, I won't be ashamed of my position or blame Tim Cook. I will accept it as easily as my winning trades. After you allocate your capital, the time to worry is over. Many people worry after they place their order and it's executed, but that's backwards. The worry needs to happen before you press the submit button, not after.

If you do your homework ahead of time and develop a plan of action, there is nothing more to worry about. If the price goes up X amount, you exit. If the price doesn't move X amount within so much time you exit, and finally if the price goes down X amount you exit.

For every investment, you should have four price points as a minimum, and that's if you don't scale in or out. If you scale in and/or out of a position, then you have four conditions instead of price points. With this approach, you eliminate guesswork, emotion and worry.

The first price point/condition is your entry. The other three are your exits, entered at the same time. Emotion is your enemy and will reduce your overall portfolio gains much more than selling a stock at the wrong time because of your investing rules that you stick to.

Here are my rules for selling Apple put option premium. When the trade is over, you will know if I made or lost money. I will sell the May strike because it has about 28 trading days. My primary objective is to capture time decay and four weeks is generally the minimal amount of time that is worthwhile for this strategy.

I want to sell puts instead of covered calls (same thing from a total risk/reward point of view) because it involves one transaction instead of two, and a synthetic covered call (a cash secured put short is a synthetic equivalent to a covered call) should have slightly less premium than a put with a stock that is falling.

My next concern is the strike price. I want to choose a strike that if Apple does fall below, it's likely to recover to (there are other considerations that go beyond the scope of this article). The $350 strike price meets the criteria.

I will sell a May $350 strike price put option for $6.10/contract if able on Friday. I will use a stop loss of $12.20, and a profit target of $2 for the first week, $4 for the second week, and if I hold beyond that, I will want to close out for 10 cents or less. The option expiration date is my hard time limit for the trade.

After placing the trade, I know I have already completed the worry, thought process and method of action. The only thing left to do is watch Rocco Pendola the next time he is on CNBC.

At the time of publication, the author held no positions in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
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