If you’re a buyer of what Amazon.com, Inc. (NASDAQ:AMZN) sells online, you’re not alone. But AMZN stock has become somewhat less friendly and trendy off and on the price chart. As such and in our view, Amazon now offers bears a reason to shop and hit the buy button on a lower-cost, high-reward options spread.
I’m guessing that like you, I have grown to love Amazon the last few years. However, I’m actually less of a fan these days of AMZN stock and possibly even Amazon as a company, for a few reasons.
From a financial standpoint and even with world domination apparently its mission statement, a recent huge profit miss with AMZN stock’s nosebleed price-to-earnings ratio of nearly 200 and massive market capitalization approaching $475 billion can’t as readily be ignored.
Secondly, there has been some modest but increased levels of concern that Amazon is getting a bit too big for its britches or maybe large enough for the government to intervene. For anyone in need of a history lesson, there has been precedent back when landlines were simply known as phones.
Any future action from regulators could ultimately force Amazon to break apart its growing empire of retail, technology and entertainment businesses. And while a solution could ultimately benefit shareholders, uncertainty over the course of a drawn out legal affair would likely prove to be a drag on AMZN stock before enriching shareholders.
Fundamentally, if we can’t free ourselves from the addiction of buying for convenience, it’s going to cost society in more than one way. We’re on a road in which Amazon takes control of more and more businesses and shackles the remaining others increasingly reliant on its massive reach across the United States of Amazon and beyond. And for those reasons and more, I’m more than a bit cautious on AMZN stock.
AMZN Stock Weekly Chart
The path up hasn’t been without incident, as there have been a couple corrective-style bumps in the road. In general though and as the provided weekly chart attests, AMZN stock has been a very friendly trend for bullish investors the last couple years.
Getting past the obvious, if we’re to believe tops are messy affairs the volatile price action over the last couple months in conjunction with a recent and bearish shooting star reversal candle suggests AMZN stock is due for another period of price discounting.
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AMZN Bearish Vertical Spread
With past corrective moves in the 20% to 30% neighborhood the last couple years, conservatively a move to $900 doesn’t seem unreasonable. A slightly larger drop of 22% would actually put AMZN stock into a testing position of 2017’s corrective base breakout.
AMZN Stock Trade Idea
Bearing that in mind and adding a bit more conservatism, using a modestly positioned spread which also further reduces Greek risks sounds like a good way to play AMZN stock for a bearish price move.
In reviewing AMZN stock’s options board, the Oct $940/$925 put spread for up to $4.50 looks well-priced given what’s been presented.
Risk for this vertical is contained to the debit paid and amounts to less than 0.5% of risk associated with the current share price of Amazon. And should a lesser and fairly common corrective move of 15% occur, profits of up to $10.50 and return of 233% are possible below $925 at expiration.
Investment accounts under Christopher Tyler’s management do not currently own positions in any securities 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 and StockTwits.
