We’re recommending a new bearish trade on Amazon.com, Inc. (NASDAQ:AMZN).
Amazon gapped up and started a strong bullish run after its last earnings announcement in late January, but we think the move to the upside has been overblown — especially in the current market environment where traders are questioning what type of a pullback we may see on Wall Street.
We anticipate AMZN stock will drop to near-term support at $365 in the short term (this level served as resistance in late July of 2014 and short-term resistance in early February of 2015) and eventually drop all the way back down toward $350 (this price range served as resistance in early September of 2014 and marked the top of the gap that formed in late January of 2015).
Amazon surprised investors with higher margins in its last earnings announcement. However, that was in a holiday quarter, and the company is still facing huge forex headwinds as a rising U.S. dollar (USD) is eating into the company’s international revenue. While the company is seeing growth in its Prime membership numbers and its Amazon Web Services (AWS) segment is strong, we don’t believe Wall Street will be able to justify the current forward P/E of 166 for much longer.
Instead of regular options, we’re playing this with “mini” options, not “full-size” options. This means they only control 10 shares of Amazon instead of the standard 100 shares we typically see with option contracts.
With these mini options, the bid/ask spread can be a little wider than with typical options, so you may have to adjust your limit orders if you don’t get filled quickly. However, the full-size Amazon options have tons of volume, so splitting the bid/ask spread on the minis and getting those trades filled shouldn’t be a problem.
Use a limit order to ‘buy to open’ the AMZN April 365 MINI Puts (AMZN7150417P00365000) for a maximum price of $11.00.
While we will definitely not be holding this trade until Amazon’s next earnings announcement on April 23 (because the option will expire before then), we should benefit from some of the implied-volatility increase that tends to precede this company’s earnings announcements.
InvestorPlace advisers John Jagerson and S. Wade Hansen, both Chartered Market Technician (CMT) designees, are co-founders of LearningMarkets.com, as well as the co-editors of SlingShot Trader, a trading service designed to help you make options profits by trading the news. Get in on the next SlingShot Trader trade and get 1 free month today by clicking here.
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