Since soaring to new heights following last month’s rousing earnings release, Amazon.com, Inc. (AMZN) has quietly pulled back, forming a potential low-risk entry for would-be buyers.
Indeed, in a world where retail stocks are falling from the sky (see the SPDR S&P Retail ETF (XRT), down 11% over the past month), Amazon stock appears a bright light in an otherwise dark sector.
The question of when AMZN rises again isn’t a matter of if, but when. Fortunately, the charts offer more than a few clues on where buyers are congregating below. These gathering grounds will act as potential support levels should Amazon keep dropping.
First up, we have the $680 zone. The oft-repeated wisdom that old resistance becomes new support comes to mind here. Said principle of polarity has proven its worth time and time again. Back in the fourth quarter of 2015 this pesky ceiling stymied Amazon’s ascent numerous times.
It even reared its ugly head last month, halting the stock’s earnings-induced jump in its tracks. Now that we’re above it, however, it may prove an equally stubborn support level.
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Should this level fail, look to the 20-day moving average as the next potential floor. Buyers have materialized a few times near this oft-watched average over the past year.
I’ll toss in one more for good measure. Unfilled gaps have a tendency of acting as support. In fact, the $654 area already did so a couple weeks ago. Should the Amazon stock dip really go the distance, consider this zone the final line in the sand. Should it fail, well, then this pullback morphs into a larger correction that warrants a bit of caution.
A High Odds Play for Amazon Stock
Given its lofty price tag, option spreads are a must here. If you think the retracement in AMZN stock remains shallow consider selling bull put spreads. Wait for confirmation that the stock has found support, however, and that a new upswing is upon us.
While the prices will undoubtedly change, currently the June $630/$625 bull put spread can be sold for 51 cents. By selling the put spread we’re essentially betting Amazon stock will remain above $630 for the next month. The reward is limited to the initial 51 cents and will be captured if the stock sits above $630 at expiration.
The risk is limited to the distance between strikes minus the net credit, or $4.49, and will be forfeited if AMZN drops below $625 by expiration. To reduce the loss, consider exiting if AMZN reaches the short strike price at $630.
The $630 put option currently boasts a delta of 12, suggesting an 88% probability the put spread will deliver a profit at expiration.
At the time of this writing Tyler Craig had no positions in any of the aforementioned securities.
