As a consumer, there’s plenty of reasons to love Amazon.com, Inc. (AMZN). But traders have much to love for as well, and a bullish position in AMZN stock makes plenty of sense right now.
Amazon stock experienced a brief 9% blip after reporting earnings results last week, followed sharply by investors tossing AMZN out like the proverbial baby with the bathwater.
The result? AMZN stock finished off 7.5% lower after disappointing the mighty Wall Street gods. It’s been downhill ever since, with Wednesday’s session proving itself a continuation of that trend.
Relative weakness appears tied to disappointment in Amazon’s brick-and-mortar bookstore initiative, which overlooks Moody’s upgrade of Amazon’s credit from negative to stable.
To quote Jim Cramer regarding AMZN stock, “Amazon is an emotional stock in a market with a terrible mood disorder.”
As a trader I’ve been both bullish and bearish on Amazon. Most recently, in the first half of December, I wrote about a short positioning opportunity in the stock.
A couple months prior I penned a bullish piece on Amazon, as shares had digested massive year-to-date gains and looked poised for upside with earnings acting as a catalyst.
Both analyses proved prescient. The more recent bearish focus returned $13.50 per contract, or 540%, on $1.50 risk using a January vertical in Amazon’s stock.
Both write-ups also lent credibility to the adage, “bull and bears make money, but not pigs.” And that goes for trading in general, not just AMZN stock.
Now I’m bullish on Amazon again … kind of.
AMZN Stock Daily Chart
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At the same time, AMZN’s low on Wednesday returned shares to a testing position of congestion developed within its prior formidable symmetrical triangle. Again, more support.
That test has resulted in Amazon retracing 38% of its 2015 cycle low to high, while establishing, some might say, a much needed and healthy corrective move of 23%.
Having said that, and as Cramer notes, the overall market is going to play a huge part in whether the expectation for a shorter-term technical reprieve in AMZN stock can lead to longer-term support.
Should the broader market fail to hold itself together, AMZN could ultimately see the $440 to $490 range before this strategist would be more bullish on a significant low being at hand.
One Strategy to Profit From AMZN Stock
Given our view and looking at Amazon’s stock options board, I like the idea of using a slightly out-of-the-money Feb $500/$490 bull put vertical for a credit of $1.75 or better.
This vertical offers a return on investment of 21% with a holding period of just over two weeks. You collect the full credit if AMZN stock is above $500 at expiration. Currently, shares are at hovering around the $525 mark.
The vertical provides a cushion of about 5% on an expiration basis, before the potential profit begins to turn into a potential loss. Having said that, risk is limited to the $8.25, or roughly 1.5% of the underlying shares of AMZN.
For AMZN stock traders building a long stock position, this type of limited risk positioning allows you to accumulate on weakness.
Investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT.
