by Tyler Craig | November 8, 2011 8:30 am
Following last month’s post-earnings beatdown, Amazon (NASDAQ:AMZN) has powered its way higher as buyers have stepped in to scoop up what is looking like a bargain.
In the short term, AMZN has been basing sideways at the key resistance level of $219. Once AMZN musters the strength to break above this level, it should continue its run higher to fill its earnings gap.
The higher price tag on AMZN shares spills over into the options arena. The expensive price of most option contracts available could serve as a deterrent to many would-be option buyers. However, don’t let the price stop you from investing in what could be a potentially profitable trade.
Fortunately, option spreads offer you a much-cheaper way to place a bet while still being exposed to an expected move in the underlying stock. While there are numerous spreads to choose from, the simple bull-call spread may be appropriate in this situation.
Looking for bullish exposure in this online retailer? Consider the purchase of an AMZN December 220-230 call spread that you can currently enter for $4.
Buying this spread consists of “buying to open” the Dec 220 Call (which would cost approximately $9.50, at current prices). At the same time, you’d also be “selling to open” the Dec 230 Call (which would give you a credit of about $5.50 at current levels).
The max risk is limited to the initial debit paid ($950 – $550 = $400), and the max reward is limited to the distance between the strikes ($230 – $220 = $10) minus the debit, or $600.
At the time of this writing Tyler Craig had no positions on AMZN.
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