Amazon Options Have Gone on Sale

by Tyler Craig | August 16, 2012 9:16 am

Despite the veritable snooze-fest that has taken hold of the broader market in recent days, some tech stocks like Google (NASDAQ:GOOG[1]) and Apple (NASDAQ:AAPL[2]) were able to buck the sleepy trend and break out to new multi-month highs this week. If Wednesday’s trading session is any indication, it appears Amazon (NASDAQ:AMZN[3]) is vying to follow in the footsteps of its tech brethren with its own breakout.

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The world’s largest online retailer formed a classic bullish engulfing candle, with higher-than-average volume to boot. Though AMZN has consolidated for the past month, it appears it might be ready for the next phase of its uptrend if it can breach its recent highs of $238.

A brief survey of option prices on AMZN reveals implied volatility is in the gutter. At 25% (gold line), it is officially lower than it has been at any time during the past two years. Such a fact reveals the relative cheapness of options right now, which diminishes the appeal of option-selling strategies like covered calls and bull put spreads while increasing the appeal of option-buying strategies like long calls and bull call spreads.

Traders looking to jump aboard the bull train in tech might consider the following two plays on AMZN.

  1. Buy the Sep 230 calls at $12.
  2. Buy the Sep 235-245 call spread at $4.60

The first trade represents the more aggressive trade, and while boasting a potential unlimited reward, also subjects traders to $1,200 of risk. The second trade offers notably less risk at $460, but also caps the profit potential at $540.

As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.

  1. GOOG:
  2. AAPL:
  3. AMZN:

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