Although numerous vulnerable stocks have fallen victim to the recent market drubbing by breaking key support levels, some of their stronger brethren have weathered the sell-fest with uptrends intact. Those inclined to buy the current market pullback ought to focus on such securities which have outperformed amidst the frenzy. When and if the market does bounce back, these stocks likely will be the leaders.
One such technology company among the ranks of the strong is Amazon (NASDAQ:AMZN). After ripping to new yearly highs in response to its recent earnings release on July 27, it has formed an orderly four-day pullback on average volume. If the current uptrend has plans for continuing, AMZN should find support around these levels in the not-too-distant future.
Click to Enlarge Traders willing to bet AMZN fails to drop below $220 by August expiration might consider selling the Aug 220-215 put spread. To enter the position, traders would sell the Aug 220 put while buying the Aug 215 put.
Currently, the spread can be sold for around 75 cents, which would represent the maximum profit and be captured provided AMZN remains above $220 for the next two weeks. The risk is limited to the distance between strike prices ($5 in this case) minus the initial credit ($5 – $0.75 = $4.25) and will be incurred if AMZN sits below $215 at expiration.
With the Aug 220 put possessing a delta of 21, the options market is pricing in a 79% probability this spread turns out a winner by expiration. The suggested spread, then, is a high-probability alternative to other bullish option plays like buying calls.
As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.