We just tested 2.4 million AAPL strategies, here is one of our favorite bearish ones...

Today we’re going to look at a good AAPL swing trade strategy. This is a good bearish strategy if you like to trade every 7-10 days. In today's report I'm going to highlight the technical triggers for this strategy as well as the Bearish Option trade that I wrapped around it last week.

Let’s first take a look at the results from the last three years broken down into our 5 step framework. 

Strategy Results using Our 5-Step Framework

As of October 31, 2016

#1. Effectiveness: $65.87 per share profit in 3 years

#2. Consistency: Profitable for the last 4 years tested 

#3. Batting Average: 57.4%. (56 winning trades vs 47 losing trades)

#4. Average Winning: 

- Average Gain on Winners: $2.08

- Average Loss on Losers: $1.07

Net gain per avg. trade: $1.01

#5. Time in trade: 

- Winning trade avg. duration: 2.7 days

- Losing trade avg. duration: 1.6 days

Why this Strategy Works: This strategy benefits from both a good batting average and a higher average gain vs. average loss per trade. Those two combined gives this strategy a high probability of long term success. Let’s take a look at the strategy rules. 

Strategy Rules: Moving Average Cross and Stochastics

Entry: To effectively implement this strategy, it is necessary to buy AAPL shares once both the conditions of the trade have been met, or “proven “true.” In this case, that’s when the 10-day bearish crossover of the Stochastics has occurred along with the occurrence of a bearish moving average crossover of the 6 day simple moving average below the 13-day double exponential moving average.

The purchase of shares must be made prior to the close of that day’s trading session.

Exit: In order to exit the trade, either of the original two conditions of the trade must have ended, or have proven “false.” That would be either a reversal of the Stochastics bearish crossover or a reversal of the original double exponential MA bearish crossover.

An equal number of shares to the entry amount must be sold once the initiating conditions of the trade have ended, in this case once 

Let’s take a deeper look at the results...

Effectiveness: How successful has the strategy been for AAPL? During this time frame, the stock has generated a profit of $65.87 per share.(Note: Not including any reinvestment of profits back into the stock during that time period.)

Consistency: Based on the stock’s performance over the last four years, this strategy for AAPL has consistently yielded a discrete profit each year.

Batting Average: Over a 3-year period, AAPL had a total of 56 winning trades, vs. 47 losing trades for a “batting average” of 57.4%.

Price Change: For every winning (bearish) trade, AAPL has yielded an average profit of $2.08, while each losing (bullish) trade has lost $1.07 per trade. That gives this AAPL Leading Strategy an average per trade gain of $1.01.

Time in trade: The average duration of each winning (bearish) trade came in at 2.7 days, while the average time in for every losing (bullish) trade was 1.6 days.

Overall this AAPL strategy has proven to be an effective and profitable one in a bearish environment. The strategy has proven a winner 66.6% of the time over the course of the last 6 months. This ratio shows the soundness of this Leading Strategy remains intact and profitable.

Here’s the options trade I used and why

First, I knew based on the above information that this trade cycles every few days so I could use a short term option. The trade entry day was a Wednesday, so it was a little too close for me to use Friday’s options. So I selected the next week’s options expiring in 9 days. 

Second, I knew I wanted to be directionally short based on the fact that the strategy is bearish, so I knew I wanted to either be short calls or long puts. I selected a put vertical debit spread. This gave me good risk reward and also complimented the average trade price and duration. 

Here’s my options strategy: AAPL Bear Put Debit Spread

Strike prices and expirations

- Bought 4 Nov $114 Put

- Sold 4 Nov $111 Put 

Price of AAPL at start of trade: $115.20

Date: Wednesday, Oct 26th

Average fill Price for spread: $75

Data pulled from above:

- AAPL Average days in Strategy 2.7 days

- AAPL Average Dollar move for a win $2.07

So you can see I gave myself a little buffer on both time and price. Time by buying 9 days instead of 3, and price by buying a 3 point spread instead of a 2 point spread. 

Here’s the risk profile of this spread at expiration 

I got filled on this debit spread between $70-$78 per spread with an average fill of $75. I bought 12 contracts on each side. 

The spread is 3 points (from 114 to 111) so I know there is $300 total in the trade. With this information I can take my debit of $75 and subtract that from $300 to get my total max profit potential of $225. 

This is a cool vertical spread trick: The risk and reward of a vertical credit spread have to equal the size of the spread. So in my case I had a 3 point spread (300). I knew that if my risk was $75 my max reward was $225  (they have to equal 300). I did 12 contracts on each side of the spread which kept the cost or max risk for me just under a thousand dollars and the max reward closer to three thousand dollars. 

Advantages of Debit Spread: The debit spread works great because by buying and selling an option you somewhat neutralizing the negative effects of time decay. 

Disadvantages of Debit Spread: With such a limited amount of time (only 9 days) this trade had to move down fast. In the beginning of this trade time is your enemy, this continues to be the case as long as AAPL stays above the theta flip price. The theta goes positive and works in your favor as soon as price moves down enough to below the theta flip level. Also, by selling a downside put my profit potential is capped by the spread. I was okay with this because I knew the average move was only a couple bucks. 

Getting Out of the Trade: The technical strategy triggered out of this options trade the following monday for a average fill of $112. This is above a 49% profit in the trade before commissions. Not a bad trade!

Currently, as I write this, the options from this strategy are expiring today (November 4th) and the spread that I sold for $112 is now trading for close to its full value of $225 since the 111 puts are in the money (AAPL is trading at $109.31). So I would of made multiples more if I held all the way through expiration. At the time of course there was no way of knowing where AAPL would be today. 

Did I make the right decision in following my rules? 

Did I make the right decision to follow my rules that day I got out for 49% profit? Or should I of held my vertical spread position all the way to 200% gain (where it is today at expiration)?

Did I make the right decision? What would you have done? Let me know in the comments below… thanks in advance.