News of Amazon’s (AMZN) future plans for drone delivery airlifted Amazon stock in early trading Monday, but despite the excitement over the revolutionary concept, investors eventually used the hype as a selling opportunity. By day’s end, the small pop in AMZN shares fizzled, with Amazon finishing fractionally in the red.
But rather than backing up the truck for Amazon stock at current prices, investors should wait until a better, lower-risk entry point develops.
With AMZN shares having gone parabolic and a major psychological level looming overhead, a correction is becoming increasingly likely. In the world of Wall Street, big, round numbers carry a fair amount of significance. Thus, with Amazon stock trying to break above $400 for the first time in history, it wouldn’t be surprising if the world’s largest online retailer needs a few attempts before the bulls finally prove successful.
Click to Enlarge Further elevating the odds for at least a pause in Amazon stock is its severely overbought status. With Monday’s up-gap, AMZN landed squarely above the upper Bollinger Band, suggesting the stock had reached unsustainable heights. Not surprisingly, a flurry of profit-taking caused the stock to end with a nasty looking high volume bearish reversal candle.
At a minimum, Monday’s reversal should make you think twice about bullish plays. Wait for a pullback or at least some consolidation to allow the stock to build momentum for the next up-leg. If you’re comfortable with a counter-trend trade and think further upside is limited in the short-run, consider selling bear call spreads.
With December expiration looming a short 17 days away, you could sell the AMZN Dec 415-420 call spread for 70 cents net credit. The position is entered by simultaneously selling the Dec 415 call and buying the Dec 420 call.
The max reward is limited to the initial 70-cent credit and will be captured if Amazon stock sits below $415 at expiration. The max risk is limited to the distance between strikes minus the net credit, or $4.30.
To keep the potential loss at a minimum, however, you could close the position if AMZN rises above $415.
As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.