Amazon.com Inc. (AMZN) is a proven winner. On Main Street, it’s known for its unmatched services to its users — especially Prime members. On Wall Street, it’s famous for delivering incredible capital appreciation in spite a ton of haters.
Those who are long have profited well from owning AMZN stock. Those who insist on shorting it have likely had serious challenges for over a decade.
Rarely do we see charts like Amazon’s for such an extended period of time. I call AMZN the ultimate startup, since it acts like one every time it enters a new business arena. What’s impressive is that Amazon generates enough cash on its own to feed the growth.
Case in point: Amazon stock rallied 10% on its latest earnings report. Its critics still cite valuation as a reason to short it, but this a flawed thesis since Amazon management has shown that it can turn a profit with a switch of a button. So far, AMZN remains committed to reinvest into growth.
Even though Amazon is not a young startup, AMZN stock should still be evaluated as such. When assessing growth companies, it’s best to assess growth not profitability, especially since AMZN is not bleeding cash. It’s merely reinvesting its profits into sustaining unparalleled growth.
I am not a fan of chasing sharp price spikes like the one Amazon stock just experienced. Yet, I still see an opportunity to cautiously profit from the recent price action in the near term.
Part of my trade will involve shorting the stock, but I won’t be reckless with it.
AMZN Stock Trade
Click to Enlarge I will use the options markets where I can structure hundreds of Amazon stock trades without the immediate risk of loss. Using the options markets, I can specify my max loss, my time until expiry and the likelihood of my success.
Trade #1: AMZN Jan $880/$900 credit call spread. This is a bearish trade for which I collect $1.90 per contract. Theoretically, I have a 90% chance of success. Potential yield is 10%.
Since I currently have a short-biased portfolio, I want to balance this trade out with a credit put spread. I would probably not do this if I were already long Amazon stock specifically or markets in general.
Trade #2 (optional): AMZN Jan $400/$380 credit put spread. This is a bullish trade for which I collect an additional $1 per contract. Theoretically this also has a 90% chance of success. Trade #2 won’t require additional margin reserve since I can only lose on one side or the other. Taking this credit put spread will not only balance my trade but almost double my potential yield.
Taking both trades would constitute an iron condor with a sizable upside or downside buffers from current price. AMZN stock can rise or fall 30% before it hits either short leg of my iron condor.
Having an expiration with months on the clock also makes it easier to manage.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities.
