Investors are buying what Amazon.com, Inc. (NASDAQ:AMZN) is selling, but we’d advise against that. In fact, don’t spend a penny on Amazon stock.
When in an overbought situation, put a credit put spread to work and name the price you’d like to pay for a discount on today’s prices. Let me explain.
As consumers, we are all aware that Amazon sells in a very big way. But Amazon is also spending hand over fist and Wall Street is in the mood to buy it.
Most recently, CFRA Research increased its price target on AMZN stock from $885 to $975 citing the company’s aggressive across-the-board investments in “fulfillment, content, hardware services and international expansion.”
The brokerage expects the strategy will pay big dividends for Amazon and an in turn Amazon stock. More aptly, it will at least simplify the company’s various business ventures and boost revenues, but at the expense of profits through fiscal year 2018. Before you try to knock the trade off, it’s a strategy that’s benefitted AMZN stock investors in a big way.
Bottom line, Amazon stock is up 20% in 2017 following last year’s 11% rake and 2015’s massive gain of 117%. But is AMZN stock offering today’s investors something worth buying?
Amazon Stock Daily Chart
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Without certain knowledge of what would follow, my forecast was that Amazon would see some likely downside pressure. The view was tied to AMZN stock’s inability to charge higher from its handle breakout, less-than-terrific volume and a lack of support from stochastics.
I was wrong on one level, as shares are now firmly higher. However, the ensuing four-plus weeks of lateral consolidation (and a few false moves out of the pattern) were likely far from easy for bullish AMZN stock investors.
After a second successful break-out attempt last week, Amazon appears modestly extended in the near-term. Mainly, Amazon shares are trading outside the upper Bollinger Band for a fifth session and sporting an overbought stochastics indicator.
Considering the situation, the expectation is for modest profit-taking before a higher and sustainable stock price might be realized.
AMZN (Bullish) Credit Put Spread
In spite of the prior, modest technical misdiagnosis, I did present a credit put spread as a way for investors to collect income and buy AMZN stock at a discount. It worked out nicely. Obviously, though, at this point those profits trail those of an investor that simply purchased shares.
Reviewing Amazon’s options and once again, my attention is focused on this type of vertical strategy. One spread of interest is the April $870/$865 put credit spread. With Amazon stock near $898 the vertical is priced for 75 cents.
The 75 cent credit is kept in full if at expiration AMZN is above $870. By using the April contract the trader also doesn’t have to necessarily hold a position through Amazon’s next earnings event. The strike placement also provides this cautiously bullish trader a margin of safety of just over 3% versus the current price of AMZN stock.
The real disadvantage with this strategy is if our forecast is wrong. Similar to last time, if AMZN were to rally higher by a meaningful amount, the trader’s 75 cents in profit will look like too conservative of a position in hindsight.
On the flip side, the vertical limits the investor’s risk to $4.25 regardless of how low AMZN shares move during the spread’s holding period. If the investor is a buyer of Amazon stock at lower prices, one trader’s loss could work out to a well-discounted purchase of $369.25, or a much better deal in the event other investors decide to dump their merchandise far below $365.
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.
