Amazon.com, Inc. (NASDAQ:AMZN) stock has pulled back sharply after failing to rally to new highs following Amazon Prime Day.
I look for Amazon stock to struggle moving forward and for the recent highs to hold over the coming week.
As the chart below shows, AMZN stock made a new all-time intraday high at $757.34 on July 12, before turning and heading south and closing lower on the day. This type of key reversal day is many times indicative of a short-term top in the share price, especially following such an enormous rally.
Amazon stock also shown other signs of fatigue, with on balance volume slowing after reaching a recent extreme.
This is a confirming indicator and will many times coincide with topping action in the underlying shares.
Certainly AMZN has had quite a rally over the past 12 months, up over 60% in that time frame. Of the top 50 biggest stocks by market cap traded in the U.S., Amazon was far and away the best performer during the last year.
This type of relative outperformance inevitably will slow.
With a market cap of nearly $350 billion, Amazon is now the sixth largest company traded on U.S. exchanges. It also now has a market cap more than 50% larger than retail giant Wal-Mart Stores, Inc. (NYSE:WMT), even though Walmart has $483 billion in sales versus just $113 billion for Amazon.
Of course, there is always that valuation argument surrounding AMZN stock, which is now trading at a price-to-earnings ratio of 305 (versus a 16 P/E for WMT).
So with AMZN looking tired from a technical perspective after a monster move and most assuredly richly valued fundamentally, a pause in the rally certainly would not be unwarranted. To position to profit from this expectation, a short call spread makes sense to me.
AMZN Stock Trade Idea
Buy the July 22 $765 calls and sell the July 22 $760 calls for 65 cents of net credit or better.
I chose July 22 because I want the trade to expire before Amazon’s July 28 earnings date.
The short $760 strike is positioned roughly 19 points above the AMZN closing price of $741.20 and also above the $757.34 all-time high.
Maximum gain is $65 per spread, with maximum risk of $435 per spread. Return on risk is 14.94%.
I would look to close out the spread on a meaningful move past the all-time high of $757.34, while letting the spread expire worthless and keeping the initial $65 credit if AMZN 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.
