How to Play Apple's Pullback

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

NEW YORK (TheStreet) -- Just when I thought we were safe, it's happening again. Apple ( AAPL) fans are coming out of the woodwork claiming that some external force is, at least temporarily, back to hold America's favorite stock down. Consider these Tweets (from Tweeters who shall remain anonymous):

you didn't expect market makers to give it away so ez - did you? they need to reload share #preearning, wat better than #freakyfriday $AAPL

and

market makers have plans to run $AAPL and force squeeze I think, look at the same 4 share trades

In true Twitter form, these two Tweeters voice what is an all-too-common concern among AAPL longs and ardent fans. This stock simply cannot fall as the result of any old flavor of uncertainty or even the technical overtones of its parabolic chart. Mere mortals cannot "make" AAPL fall. It must be the work of something more sinister -- the evil market maker!

And, of course, with it being options expiration week and all, conspiracy theorists have even more fuel to add to their fire. The misuse of terms like "pinning" and "maximum pain" hits a rapid Tweet Per Hour (TPH) pace whenever AAPL drops in value, by more than 1%, during OpEx week.

9 Stocks That Prove Dividends Make All the Difference Before I continue, let me clarify something. I mean no harm to Apple (or AAPL). I love the company. In fact, I admire it. It's the best America has to offer, possibly of all-time. I consider Steve Jobs one of the most brilliant men to ever walk the face of the Earth. And I own several iPods, an iPod Touch and I am saving my pennies for iTV when it finally gets released. I just don't love AAPL stock. I don't hate it either. I am not even indifferent. That's important. I feel as little emotion as humanly possible (indifference is an emotion) when I think of AAPL stock, or any other stock that matter.

All I care about -- at least in one compartment of my life -- is making money in the stock and options markets. You reduce your chances of accomplishing this goal when you allow yourself to get emotionally invested in a stock. That's rule No. 3 (next to buy low and sell high and short high and cover low) of investing: Never let your emotions take hold of your brain, your trading platforms and your long-term taxable and tax-deferred accounts. If the sentiment on Twitter and elsewhere across the Internet provides any reliable indication, loads of AAPL longs are breaking that rule.

In my Options Investing Newsletter, we strive to help subscribers use options in the most relatively safe ways possible to generate income, seek growth, mitigate risk and speculate on the side. We follow rule No. 4: Investing should not be exciting. It's not gambling. It should not provide an adrenaline rush. It should not make you sweat, get angry or cry.

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We also debunk misconception No. 1 about options -- that they're akin to putting it all on red. Options only work that way if you do not take the time to learn how to use them, while limiting the strategies you employ to the most basic and relevant ones for long-term investors. With that in mind, here's how I would play this pullback in AAPL.

The emotional set will flock to buy calls on AAPL. They'll likely go out-of-the-money and near-dated and then blame the market makers when they lose all of their entire investment. Now, again, let me be clear -- I do not consider an AAPL bull an idiot. I am bullish on the stock for, assuming nothing major changes, at least the next year or two. That said, I recognize that this pullback is not only perfectly normal, but it reflects the reality that AAPL needs to be perfect to continue to run.

Earnings are coming. People are skittish. What if there's some sort of bad news? I better take my profits. That's what's happening. It's normal. It's a good thing. It's the type of scenario that makes the smart, unemotional folks wealthier, while the fanatics who treat AAPL like a sports team do things like "double down" and buy OTM calls.

If you're bullish, have some sense. If you're bullish and want to use options to play this pullback, restrain yourself from the allure of suddenly cheap OTM calls. They're cheap for a reason, particularly if they expire soon (like in May). With AAPL well below $600 now, as of late in Monday's session, the probability that AAPL will expire above the strike of an OTM call has decreased. You pay less the further OTM you go because the further out you go, the worse the odds that AAPL trades toward, at or above the strike sometime between now and/or at expiration.

Smart investors will use this pullback to generate some income and give themselves the opportunity to get long now or on further weakness. If you think we've seen the bottom, consider selling an AAPL May $585 put.

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As of this writing, you take in $31.20 ($3,120) worth of premium income. That's yours to keep no matter what happens. If you get put shares, you buy them at an effective cost of $553.80 ($585 strike minus the $31.20 premium collected). If you expect more weakness, simply move the strike further OTM. If you expect a faster rebound, settle for less income by selling an April put or, though I would not do this, selling a deeper ITM put contract.

Whatever you do, keep your emotions in check.

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