It’s more than OK to like purchasing from Amazon.com, Inc. (NASDAQ:AMZN). But if you’re looking to buy AMZN stock, it may be smarter to delay that buy decision. That’s because you can wrap up a discount using the proper technique.
As most consumers know by now, there’s a lot to like about shopping at Amazon. There’s also a lot to like these days about AMZN stock. A month ago, the online retailing giant trumped profit views by nearly 12.5% in delivering earnings of $1.54 per share.
Sales for Q4 did come in a tad light, but the sheer size of Amazon’s $43.7 billion in revenues for the holiday quarter, can’t in our opinion, be discounted too much without looking like the Grinch. After all, sales grew by a nothing-to-sneeze at 27% to $136 billion for the full year, powering a three-fold increase in profits over 2015.
Cash flow also jumped 38% to $16.4 billion, and the company’s latest growth engine, Amazon Web Services (AWS) delivered a solid 47% in its quarterly sales.
So, what’s not to like about AMZN stock right now?
Management did trim, to put it mildly, its profit outlook for 2017 with a range of $250 million to $900 million versus the Street’s forecast of $1.33 billion.
The good news is Amazon’s warning isn’t nearly as damaging as it looks on first inspection. The “weak” guidance factors in aggressive investments in media, fulfillment and India. And as proof, after an initial and apparently short-sighted “sell, sell, sell!” by investors — Amazon stock has delivered the gift of fresh all-time-highs just last week.
But are Amazon shares offering you something worth buying right now?
AMZN Stock Chart
Looking at Amazon’s chart, the question “Is it, or isn’t it?” comes to mind as shares flirt with a multiday test of its prior highs from October.
Click to Enlarge
Which side holds the directional edge moving forward? My best estimate is there’s some likely pressure in Amazon’s near future.
First off, one warning is that Amazon shares officially broke out on Feb. 21 but have had difficulty going higher. Also worrisome is Amazon’s ability to rally strongly past the breakout level, which has been accompanied by less-than-terrific volume and a lack of support from stochastics.
We expect modest profit-taking, so if you’re interested in buying AMZN, there are better times — and ways — to enter.
How to Trade AMZN Stock
For investors that do wish to eventually purchase AMZN stock at slightly more advantageous prices or maybe a much larger discount and get paid to wait it out—a credit put spread looks attractive.
Reviewing Amazon’s options and given our view of shares prone to at least a modest pullback, the Weeklys 07’ April $815 / $810 put spread is priced for $1.00 with AMZN stock at $847.60.
The real disadvantage with this strategy is if our forecast is wrong and shares of Amazon rally higher by a meaningful amount. Were that to occur, the trader’s $1.00 in profits will look like a poor decision relative to buying AMZN stock today.
But if AMZN sits or simply fails to drop below $815 or nearly 4% over the next five weeks, the full credit is captured and the trader will be sitting pretty compared to a more bullish trader that simply purchased stock.
Even better, if more aggressive profit-taking does happen, ultimately the vertical limits the investor’s risk to $4.00 regardless of how low AMZN stock might go during the spread’s holding period. And opportunistically, if the investor is still inclined to be a buyer of Amazon shares, that can work out to a very sizable discount.
Investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT.
