I have never seen a scarier competitor than Amazon.com, Inc. (NASDAQ:AMZN). Under the leadership of founder Jeff Bezos, AMZN devastated many an industry and it’s not done yet. I am sure that owners of Apple Inc (NASDAQ:AAPL) stock wished he was in charge there instead of Tim Cook. The AAPL headlines would not be for new iPhone colors but for the proverbial flying car.
Fundamentally, AMZN management proved that they can turn a profit, yet they prefer to invest their profits into growth. Amazon’s high valuation continues to tempt short sellers into trades that have led them to their slaughter. AMZN stock bears confuse spending for growth with bleeding cash. The company self-finances a steep growth curve that has lasted over a decade. Very little of it comes from loans.
However, I did not like what I saw in their last earnings report. They disappointed on web services and their top line. That cannot repeat or they will invite legitimate worry over their growth-company status. So far the threat is low but I do have to note its potential.
In February I shared a long AMZN stock trade that delivered free profits. Today I want to reset in a longer-dated version so I don’t have to worry as much about the short-term price action.
AMZN Stock Trade Idea
The Bet: Sell the AMZN Jan 2018 $620 naked put for $12 per contract. This is a bullish trade that needs the price to stay above the strike sold, or I get assigned Amazon stock at $620 per share.
Selling puts is risky, so I only sell them if I am willing and able to accept losses below my sold strike. Anything below $608 per share would accrue losses for me. In this worst-case scenario, I would be long AMZN at a 26% discount from current levels.
To mitigate this open-ended risk, I can turn this trade into a credit spread instead.
The Alternate: Sell the AMZN Jan 2018 $620/$610 credit put spread for $1. This trade has a 90% theoretical chance of success.
Note of caution note: Markets being near all-time high levels adds another layer of risk. If equities correct, AMZN stock, being a momentum stock, would likely fall faster than the averages.
Learn options as easy as 1-2-3 here. 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.
