Mike Khouw's Apple Trade

Mike Khouw teamed up with Carter Worth on CNBC's Options Action to show the viewers how to set up a trade in Apple AAPL that can offer protection if the stock pulls back before it continues to move higher.

Worth analyzed the price action in Apple that led to spike above $100, and he showed a cup and handle formation. He explained that the stock followed the textbook when it comes to price reaction after a cup and handle forms on the chart. As he expected, the stock reached its all-time high, and now he thinks that Apple is going to face some resistance before it continues to trade higher. His advice is to hold the stock and to look at the options market for a protection.

Khouw thinks that the best way to hedge a long position in Apple is to sell a covered call. He suggested that investors should sell the November 105 call option for $3.30, which is approximately 3 percent of the stock price. The break even for this trade is at $108.30, which is a good exit level for Apple, according to Khouw.