Amazon.com, Inc. (NASDAQ:AMZN) rewrote the book on how to grow a company’s top line. Under Jeff Bezos, AMZN stock managed to enter and dominate dozens of high profile industries … one of which was what we’ve come to know as ‘the cloud.’
As accomplished as this company has been, I still see stubborn experts trying to short AMZN stock for fundamental reasons. Sure, I’ve occasionally had short AMZN positions, but they were always part of a range trade. I have shared trades that generated profits out of thin air by selling iron condors into AMZN. Here is a November trade that generated over $3 per contract of pure profit. This was 20% yield on money risked in just three months.
AMZN Stock Chart
I agree that on paper, AMZN stock looks extended. But for a company that has so far grown perpetually, the traditional valuation measuring sticks are not as useful.
Click to Enlarge Technically, one could have made an argument that $700 per share was in the cards since 2007.
Today I want to rinse and repeat. AMZN stock reported a decent quarter, yet markets sold it down $100 on general political fears. This is usually an opportunity to sell some bullish risk below market levels.
Meaning I sell bullish put spreads with a healthy buffer below.
Amazon Stock Trade Ideas
Trade No. 1 — The Bet: Sell AMZN Dec $710/$705 credit put spread. This is a bullish trade for which I collect 50 cents per contract to open. By selling it, I have an 85% theoretical chance of yielding 10% on money at risk.
When selling spreads, I like to leave room for error. In this case I only have a 6% buffer from current price. Usually I like a bigger buffer, but AMZN has recently fallen about $100 from its highs.
To mitigate risk I often like to balance my bet. To do that I can set a similar but opposing trade.
Trade No. 2 — The Hedge (Optional): Sell AMZN Dec $845/$850 credit call spread. This is a bearish trade for which I collect 41 cents per contract to open. This trade has a buffer of 10% from current price. This would theoretically translate into an 85% chance of success to yield an additional 8% on money risked.
Click to Enlarge Taking both trades, I would have sold an iron condor, which is a range-bound trade, meaning I need AMZN stock price to stay between both trades to earn maximum profits.
This setup is much tighter than my usual preference. But since I already have had several wins under my belt from Amazon, I am going a bit more aggressive with this thread-the-needle trade.
I do have to recognize that short term, AMZN stock needs a bounce or risks inviting more technical sellers. This would likely be decided by the outcome of the Elections.
The AMZN bounce would require a clear win for Clinton. If we get a contested outcome, then the uncertainty would linger thereby placing more downside pressure on equity markets in general.
I am not required to hold these AMZN trades through expiration. I can close either for partial gains or losses at any time.
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. You can follow him on Twitter at @racernic and stocktwits at @racernic.
