Amazon.com, Inc (AMZN) investors certainly had plenty to cheer about following the April earnings report. Earnings and revenues both blew past analysts estimates, with Amazon stock trading at an all time high of $722.45 on May 12.
On that day, I opined in an article that AMZN stock was likely being over-loved by analysts, some who had put a $1000 price target or $3 trillion market cap on the stock. I looked for Amazon stock to move back to $700 first, which proved to be prescient.
Now that shares have pulled back some 3.5% from the recent highs of $722.45 to $696.75, I am starting to get a little more bullish on Amazon stock.
Click to Enlarge Using a technical take, I would be a buyer in the $650 to $635 area, which equates to the gap created post-earnings.
It also positions just above the critical $638 support level.
Click to Enlarge Following the recent consolidation in Amazon, shares are no longer overbought on a 14-day RSI basis. A move toward the $650 area would likely lead to an oversold reading.
By positioning at this level, I am effectively able to get long at near pre-earnings levels. While the debate over how to value the stock will continue raging, the fact remains that the company delivered an outstanding quarter and continues to see strong growth.
Rather than waiting for Amazon shares to come down to these levels, I look use an options trade to get paid while waiting. By selling an out-of-the-money put spread, I can collect the option premium now in exchange for the obligation to buy AMZN at a level I find attractive.
Amazon Stock Trade Idea
Buy the AMZN June $645 put and sell the AMZN June $650 put for a 55 cent net credit. These are the regular June monthly options that expire June 17.
The maximum gain on the trade is $55 per spread, with the maximum risk of $445 per spread. Return on risk equates to 12.35%.
The short strike price of $650 provides a 6.7% downside cushion to the $696.75 closing price of Amazon stock. I would look to close out the trade on a meaningful move into the $650 to $635 gap area, while letting the position expire worthless and keep the initial credit if Amazon stock remains well-behaved.
As of this writing, Tim Biggam did not hold a position in any of the aforementioned securities. Anyone interested in finding out more about option-based strategies or for a free trial of the Delta Desk Research Report can email Tim at tbiggam@deltaderivatives.com.
