Amazon.com, Inc. (AMZN) has been a hot mess this year. With the Nasdaq Composite up roughly 15% in 2014 you would think a popular tech stock like AMZN would be basking in gains. But, well, you’d be dead wrong.
Interestingly, AMZN stock has matched the Nasdaq’s performance pretty closely … just in the opposite direction. It’s down 20% year-to-date, putting it officially in bear market territory.
Of course, AMZN hasn’t entered bear country quietly. No, its decline has been interrupted by a number of valiant recovery attempts. All looked promising. And, in the end, all utterly failed.
If Amazon’s stock chart could talk, I suspect it would say something like, “I’m a bloody mess.”
And, indeed, it is. We could sum up the last eight months or so in the stock as one big, sloppy, choppy range. Which direction it eventually heads is anybody’s guess, but if this week’s smack-down is any indication, I suspect the range is here to stay for a spell.
And the beauty of using AMZN options is that we can profit from its directionless disposition.
Embrace the Range with AMZN Options
One of the most popular option strategies designed to profit from neutral price movement is the iron condor. This flying fellow is created by simultaneously entering a bull put spread and a bear call spread in the same expiration month. The objective is to have the stock trade between the short call and short put so that both spreads eventually expire worthless allowing you to pocket the original premium received at trade entry.
Traders willing to bet AMZN stock remains between $285 and $355 for the next month could enter a Jan 280/285/355/360 iron condor by selling the Jan 280/285 bull put spread and the Jan 355/360 bear call spread for a net credit of 87 cents. The max reward is limited to the initial 87 cents credit and will be captured provided AMZN remains between $285 and $355. The max loss is limited to the distance between the strikes of either vertical spread minus the net credit, or $4.13.
To limit the loss, you could exit the iron condor spread if AMZN stock breaks out of its current range.
At the time of this writing Tyler Craig had no positions in any of the aforementioned securities.
