2 Trades for the Correction Rebound in Amazon Stock (AMZN)

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Like most of the market, Amazon (AMZN) was smacked hard by the recent correction. But Amazon stock has shown considerable resilience, and with Wall Street bouncing back amid improving investor sentiment, now may be the time to jump into an AMZN trade before the shares breakout once again.

AMZN 8-27-2015
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Technically, Amazon’s stock price has run the gamut during the past month. Shares peaked at $580.57 on July 24, after traders sent AMZN soaring in the wake of stronger-than-expected quarterly earnings. The stock then proceeded to consolidate those gains in the $520-$530 region, as market concerns grew and trendline support played catch-up.

The recent correction pushed AMZN down sharply, with shares ultimately bottoming near support at $450. Amazon stock has since recovered nicely, reclaiming a 50% retracement of its post-earnings high and correction low on Wednesday.  

In today’s trading, Amazon stock has also reclaimed key support at $520 — the lower rail of its post-earnings consolidation period. Keeping this trading range in mind, short-term technical resistance can be placed in the $550 area, with long-term resistance emerging near $580.

On the sentiment front, AMZN stock still sports a respectable 12-month consensus price target of $650 — a premium of about 24% to the equity’s current perch. Additionally, 36 of the 43 analysts following Amazon stock rate the shares a “buy” or better, with nary a “sell” rating to be found. In fact, four of these “buy” ratings came immediately following Amazon’s quarterly earnings report, with Stifel, B. Riley & Co., JMP Securities and Wedbush all lifting their ratings on AMZN stock in late July.

Options traders are far less forgiving, however. The September/October put/call open interest ratio for Amazon stock currently rests at 0.96, with calls and puts in near parity. There is a bit more short-term optimism, with the September ratio dipping to 0.79 … but it doesn’t look like options traders are banking on a major breakout.

Overall, September option implieds are pricing in a potential move of about 7% through front-month expiration on Sept. 18. This places the upper bound at $555.83 and the lower bound at $484.17.  Given AMZN’s technical backdrop, a breakout above $550 could lead to considerable momentum heading into the holiday shopping season.  The lower bound, meanwhile, places support well above Amazon’s correction lows, but another breach of $500 could set a bearish tone.

2 Trades for Amazon Stock

Call Spread: Those traders looking to side with the brokerage community and capitalize on the recent snap-back in AMZN shares might want to consider a Sep $525/$550 bull call spread.  At last check, this spread was offered at $9.40, or $940 per pair of contracts. Breakeven lies at $534.40, while a maximum profit of $15.60, or $1,560 per pair of contracts, is possible if Amazon stock closes at or above $550 when September options expire.

Put Sell: On the other hand, if banking on a resumption of AMZN’s post-earnings consolidation period is more appealing to your risk tolerance, then a Sep $450 put sell may be more your speed. At last check, this September put was bid at $3.15, or $315 per contract.  

As with all put sells, traders will keep the premium received for entering the trade as long as AMZN trades above $450 through September expiration. If Amazon were to trade below $450 prior to expiration, then you could be assigned 100 shares of AMZN stock per contract sold at a cost of $450 per share.

As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/08/amazon-stock-rebound-2-trades-amzn/.

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