Here is a perfect example of a trade setup on AAPL. The trade would be to short the stock or buy puts. You could also sell a credit spread with the short put having a strike price of $200.00.
Looking at the chart below you can see that AAPL was in a downtrend based on the daily chart. Even though it's recently made a nice move up we don't have a confirmed reversal of the trend so by shorting or buying puts we are trading in the direction of the current trend.
We next need to check the current value of the RSI indicator. As you can see on the chart the RSI is bouncing off of 60 which is the level we need to be below for a short trade. Remember that the 60 level on RSI acts as resistance. This gives more validity to the trade.
There is also a fresh supply zone with the top of the zone being at $198.82. The target on this trade is around $181.00 which was the low of the day on the day that AAPL gapped up from $179.50 and the stop would be set just above the top of the zone around $199.00. If price breaks through $199.00 you would close your trade.
The current price is $194.62 so your risk would be about $4.38 or $199.00 - $194.62. Your potential profit based on our target would be about $13.62 which gives us a reward to risk ratio of 3.1 : 1. We normally like to see a reward to risk of 3:1 as a minimum so this trade qualifies for our minimum reward to risk.
The above calculations are based on shorting the stock. By using options we can increase our reward to risk. We can purchase put options with a strike price of $192.50 that expire in 9 days for $2.61. If AAPL reached our target of $81.00 in 9 days then we could sell the puts for at least $11.50. (192.50 - 181.00). Our maximum loss now is $2.61 which is the cost of our put options and our profit is $11.50 giving us a reward to risk of 4.4 : 1 instead of 3.1 : 1.
If we wanted to give the trade a longer time to work we could go out another seven days but this would cost us $3.60 instead of $2.61. Our reward to risk in this scenario back down to the 3.1 : 1 that we had with shorting the stock but we have an extra seven days for the trade to work.
Another advantage of using the options verses shorting the stock is even though we have a stop set at $199.00 AAPL could gap up past $199.00 at the open and we would end up covering our short position at a higher price than we intended to. This would equate to a higher loss then we were prepared to risk.