On the surface, Amazon.com, Inc. (NASDAQ:AMZN) looks like a short seller’s dream stock. But for decades, the bears have been wrong about AMZN stock.
My last write-up on Amazon was a complete an easy win that delivered a 22% yield in about a month. Today, I’d like to set up another trade on AMZN.
Buying equities at all-time highs carries undue risk. This is especially true for a momentum play like AMZN stock. Should the markets correct, Amazon and other momentum stocks will lead lower faster than most other stocks. Therein lies the dilemma. How can I go long Amazon without taking undue risk?
Luckily, the options markets allow me to structure trades with limited and calculated risk. In this case, I will buy a bullish play since I have house money from previous AMZN trades. I also will sell bullish risk at levels that I deem unlikely to be reached.
Fundamentally, Amazon is great. It’s eating the lunch of all its competitors. The e-commerce giant has crippled brick-and-mortar retail. And it’s also beating a lot of other tech companies in the cloud with its Amazon Web Services (AWS) division.
Also, the Amazon Echo and Tap sold out during the holidays. The ubiquity of these two could infuse an influx of new Prime members. This membership money flows to the bottom line, so there could be an upside surprise.
Click to Enlarge Technically, I see AMZN’s stock price tightening. This usually resolves itself with a breakout from these levels. The direction of the breakout though unclear, I am willing to bet it will be to the upside. So I will buy that upside potential and finance it by selling risk below current levels.
I see similar bullish setups in other mega-caps like Apple Inc. (NASDAQ:AAPL). I could diffuse the risk and buy calls in the PowerShares QQQ Trust, Series 1 (ETF) (NASDAQ:QQQ). But instead I will continue betting on a clear winner in AMZN — as long as markets in general don’t correct early in 2017.
Let’s take a look at the trade.
How to Trade Amazon Stock Here
The bet: Buy the AMZN Mar $785/$790 debit call spread for $2.10 per contract. That would be my maximum risk. If Amazon rises above $790, I stand to double my money.
If you want to make this a true lotto ticket, buy the call spread much higher than current levels. The Feb AMZN $820/$825 debit call spread only costs $1.30 per contract. It’s higher, so it’s less likely to win … but the reward would be much greater.
I always like to limit my risk. In this case, I want to sell bullish risk to finance the purchase of the call spread.
The Bank: Sell AMZN Feb $675/$670 credit put spreads for 65 cents per contract. Ideally, I need AMZN stock to stay above $675 per share through mid-February.
I am not obliged to hold these AMZN trades through expiration. I can close them 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.
