When the market gets ahead of itself, stocks suffer. We had a bit of a euphoria bubble going on in the technology sector, and while that giddiness was driven by solid underlying fundamental growth and projections, Wall Street took those projections a bit far. But not all technology companies are created equal — and I’m looking at Amazon.com, Inc. (NASDAQ:AMZN) while I’m saying it. This recent selloff, in fact, could benefit AMZN stock bulls.
Read on as I explain why, and introduce you to a pair of trades you can use to benefit.
The kickoff for the so-called tech sector flash crash was a research note by Goldman Sachs. Basically, Goldman said that the FAAMG group — made up of Facebook Inc (NASDAQ:FB), Amazon, Apple Inc. (NASDAQ:AMZN), Microsoft Corporation (NSDAQ:MSFT) and Alphabet Inc. (NASDAQ:GOOG) (Google) — were overvalued and trading more like safe-haven plays, such as bonds and utilities.
In all honesty, the concerns were valid given the impressive tech sector run this year. But it may have been a bit overdone in Amazon’s case.
When it comes to valuation, Amazon stock is selling for 3.5 times its sales volume. As Dana Blankenhorn recently noted, that’s modest for a cloud company. And with AMZN being the largest online retailer in the world, it’s easy to forget that the company does more than just e-commerce.
So, the recent run created valuation concerns for tech stocks, but AMZN stock clearly is not valued in the same way as a their fellows in the FAAMG group. Amazon traders know this, and that’s why the stock is going to rebound quickly from this flash crash.
Sentiment and Technicals
Click to Enlarge The shares have already shown solid resolve, holding firm at support from their 50-day moving average and the $950 region. In fact, the only real technical hurdle ahead is $1,000 … and with this region falling once already, it should be an easier trip north this time around.
Turning to the sentiment backdrop we find continued bullishness from Wall Street. According to data from Thomson/First Call, reports that all but six of the 47 analysts following AMZN stock rate it a “buy” or better.
What’s more, the current consensus 12-month price target rests at $1,106.11, a modest 14.6% north of AMZN’s current perch — hinting at the possibility of price-target hikes going forward.
On the options front, however, Amazon options traders have grown wary.
Currently, the July put/call open interest ratio rests at 1.18, a notch higher than even yesterday’s reading at 1.17. With the flash crash still fresh in AMZN call traders minds, we could see this put trend grow in the coming week as traders remain on the defensive.
Overall, recent turmoil has sent July implieds soaring, with options now pricing in a potential move of about 6% for Amazon stock through expiration. This places the upper bound at $1,028 and the lower bound at $911.
With $950 emerging as technical support backed by Amazon’s 50-day trendline, a breach of this region could signal a bear market for AMZN shares. Meanwhile, a rally north of $1,000 would blow off the recent selloff and allow Amazon to resume its recent bull trend.
2 Trades for AMZN Stock
Put Sell: With premiums elevated right now, the safest way to profit on Amazon options is to sell out-of-the-money premium. Staying on the safe side, the Jul $900 put looks attractive, and was last bid at $9.09, or $909 per contract.
As with all put sells, traders will keep the premium received for entering the trade as long as AMZN trades above $900 through July expiration. If it were to trade below $900 prior to expiration, then you could be assigned 100 shares of AMZN stock per contract sold at a cost of $900 per share.
Call Spread: Those traders looking to bet on a rebound might want to look at a Jul $980/$1,00 bull call spread.
At last check, this spread was offered at $7.69, or $769 per pair of contracts. Breakeven lies at $987.69, while a maximum profit of $12.31, or $1,231 per pair of contracts, is possible if AMZN closes at or above $1,000 when July options expire.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
