It took more than two months, but Amazon.com, Inc. (NASDAQ:AMZN) finally had a breakout moment yesterday. Amazon jumped 2% on the day, but it was less about the size of the move and more about firmly breaking away from the $850 range. This region had been a magnet for AMZN stock, limiting the shares upside since late January.
With Amazon shares illustrating that they still have plenty of buying power on Wall Street — putting resistance at $850 in the rear-view — could $900 or even $1,000 be in the works?
From a sentiment perspective, the possibility is certainly there.
There is little room for upgrades, as Thomson/First Call reports that all but five of the 44 analysts following AMZN stock rate it a “buy” or better. In fact, part of what helped get Amazon over its most recent hump was a Wednesday note by Stifel Nicolaus in which it raised the price target on shares. Stifel couldn’t upgrade the stock, as it already rates it a “Buy,” but it did bring its price outlook from $912 to $1,025.
That’s the hope for Amazon stock going forward. The current consensus 12-month price target rests a mere 8.5% north of AMZN stock’s current location at $948.61 — so more analysts could still come out and hike price targets on the stock, even if they can’t go any higher than buy-equivalent ratings.
On the options front, however, short-term AMZN traders have taken a more defensive position. Currently, the April put/call open interest ratio rests at 1.10, as puts outnumber calls among options set to expire within the next month.
Given the premiums involved with AMZN options, and the uncertainty in the market right now, though, a degree of caution is a health thing.
Overall, April option implieds are pricing in a potential move of only about 3% for AMZN stock through expiration. This places the upper bound at $902 and the lower bound at $848.
A dip back below $850 could place AMZN stock back in its monthslong trading range, thus eating up premium for options traders. Meanwhile, a rally north of $900 could throw more fuel on the fire as more technical traders capitulate to the uptrend.
The question becomes, then: How do we trade Amazon right now?
2 Trades for AMZN Stock
Put Sell: The safest way to profit on Amazon options right now is to sell out-of-the-money premium. The recently eclipsed $850 strike looks like a solid starting point, as this region should now act as support on any pullbacks.
Furthermore, owning AMZN stock at $850 would be a bargain if the shares head toward $1,000 by the end of the year.
Traders looking to go this route might want to consider an April $850 put sell position. At last check, this put was bid at $5, or $500 per contract. As with all put sells, traders will keep the premium received for entering the trade as long as Amazon stock trades above $850 through April expiration. If AMZN were to trade below $850 prior to expiration, then you could be assigned 100 shares per contract sold at a cost of $850 per share.
Call Spread: Those traders looking to bet on a continued rally following yesterday’s breakout might want to look at an April $875/$900 bull call spread.
At last check, this spread was offered at $9.06, or $906 per pair of contracts. Breakeven lies at $884.06, while a maximum profit of $15.94, or $1,594 per pair of contracts, is possible if AMZN closes at or above $900 when April options expire.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
