Today I want to share yet another long Amazon.com, Inc. (NASDAQ:AMZN) trade and since the thesis still fits, repeat it.
Fundamentally AMZN will never make sense to a lot of investors. Even after cranking out astonishing results for over a decade, skeptics still insist that it will one day implode.
I couldn’t disagree more. Yes, Amazon stock is not cheap. Yes, the company runs on thin margins but it has mastered that which allows it to clobber the competition. Pay attention Netflix, Inc. (NASDAQ:NFLX).
Click to Enlarge Some would call me crazy going long AMZN stock at all-time highs. To that I say, it’s crazier to short it here. Bears have been trying for decades to short it and you know what they say about this being the definition of insanity.
I could tolerate being called nuts, but not reckless. No, I won’t be paying $1,000 per share. I will use options instead where I can build some room for error.
Fundamentally, the Amazon story has not worsened — in fact, it got sweeter.
I judge AMZN from the perspective that it’s still a startup. I don’t evaluate startups based on profitability. The goal is growth, and that requires spending. Bezos continues to over-deliver on growth; just look at AWS for example. Therein lies the pass on profitability.
Moreover, AMZN stock is able to profitably feed its growth. Management has even shown Wall Street that it can tighten its belt on demand to expand margins.
Since Amazon just set a new all-time high near $1,000 per share it goes without saying that my last trade was an easy win. I delivered over $5 in profits with absolutely no money out of pocket. Option trades are great that way, as long as I have a valid thesis.
Technically it’s risky business committing long a stock that’s done what AMZN just did but with profits in hand I am braver.
AMZN Stock Trade Idea
The Thesis: I bet that AMZN will not fall more than 25% this year and I am prepared to own it there if that happens.
The Trade: Sell AMZN Dec $725 put and collect $5 per contract or better. Here I have a 90% theoretical certainty that I will retain maximum gains. Otherwise I own it and will suffer losses below $720.
Selling naked options is risky, so to moderate this exposure I can use a bull put spread.
The Alternate: Sell AMZN $740/$735 credit put spread where I have less open risk but still the opportunity to yield 8%. Compare this with needing to risk almost $1,000 per share then hope that AMZN can still rally 8% just to match the performance of the spread.
Learn how to generate income from options 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.
