Bank on Amazon’s Pop Wearing Off

by John Kmiecik | October 31, 2012 7:00 am

It is not too often that a company announces earnings after the close and stock moves lower in after-hours trading, only to watch the next day end with a finish much higher than the previous close. But that is exactly what happened Amazon (NASDAQ:AMZN[1]) last week.

Sometimes things occur in the market that are difficult to reason. Most traders can attest to that, and this might qualify as one of those strange happenings. Here is a trade idea that has a little more reasoning behind it than a hard-to-explain occurrence. (NASDAQ:AMZN – $238.24): Long Puts

The trade: Buy the November 235 puts for 5.80 or less.

The strategy: The long put strategy is pretty straightforward bearish options strategy. The trade profits if the stock falls, and the put premium increases as the AMZN option moves farther and farther in-the-money. Maximum profit is almost unlimited only because AMZN can only fall as low as $0 (which is highly unlikely), and the maximum loss is $5.80 if AMZN finishes at or above $235 at November expiration. Breakeven is $229.20 at expiration based on a cost of $5.80.

The rationale: What’s going on here? AMZN missed third-quarter estimates by a relatively large margin and projected this quarter’s revenue will fall below estimates … and the stock headed north Friday in response. The reason could be that AMZN cut its operating loss and came in under most estimates. But let’s not try to overthink this one too much.

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Technically, the stock has been faltering since the beginning of October. This subsequent rise could be partially blamed on some profit-taking by the shorts.

This trade idea is not looking for a long bearish move lower, but possibly a short move lower as the stock has a minor resistance area at around $240 that has acted as support in the past. This could reverse the stock for a short period of time.

Use caution if the stock moves higher above that area of resistance.

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

  1. AMZN:

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