It seemed like Amazon.com, Inc. (NASDAQ:AMZN) and Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) were running neck and neck regarding who would close above $1,000 for the first time.
AMZN stock won that race, as it closed above $1,000 last Friday. It took GOOGL stock till Monday to do it.
Taking a look at the three-month daily chart below, the $940 level acted as previous resistance and then support for AMZN. After the stock convincingly closed above that level, it was tested again as support, and each time the stock responded and moved higher. This is the same thought process for the option trade outlined just below.
The AMZN Stock Trade Setup
Click to Enlarge The option trade is to sell a vertical put spread and to profit from time decay. The trade needs less than two weeks to reach maximum profit due to the options expiring.
Earlier, Josh Enomoto outlined why he still likes AMZN stock for a buy despite the price tag north of $1,000. In fact, in my daily trading class we have outlined this this trade idea several times with AMZN as it marched towards the $1,000 level.
Just about two weeks ago, I talked about a trade for Netflix, Inc. (NASDAQ:NFLX) in which the same concept was used. In both cases, previous resistance is used for potential support.
If AMZN stock is trading above the short strike of the put option, the option will expire worthless due to the fact that no one will want to sell the stock at that level when they could do it at a higher level in the market. An owner of a put option has the right to sell or sell short the stock at the strike price. Let’s take a look at the details of the trade idea.
An Option Strategy to Consider on Amazon
The Trade: Sell the Jun $990 put and buy the Jun $980 put for a credit of $1.25 or more.
The Strategy: The maximum potential profit for this trade is $1.25 ($125 in real terms) if AMZN stock is trading at or above $990 at the June 16 expiration. Both put options would expire worthless in that case. The maximum loss is $8.75 ($875 in real terms). This would occur if Amazon is trading at or below $980 at the expiration. Breakeven is $988.75 based on a credit of $1.25.
Consider exiting the position ahead of expiration if AMZN stock closes below the $1,000 level once again. Also consider exiting the position if the premium can be bought back at a lower level than what it was sold for. Good luck!
John Kmiecik is the head options instructor for Market Taker Mentoring, and co-author of the eBook 3 Secrets to Making Money in Any Market. Get your complimentary copy of his option trading eBook here. He can be reached at john@markettaker.com. At the time of this writing, he did not own a position in any of the aforementioned securities.
