Amazon (AMZN) stock has been bouncing around a bit, lately.
After making a new all-time high of $673.25 on Nov. 11, shares of Amazon pulled back sharply, dropping nearly 8% to an intra-day low of $622.29 on Nov. 16. Amazon stock then staged a sharp reversal, rallying 4.4% to trade at nearly $650.
While some of the bounce was attributed to news of George Soros taking a large stake in AMZN, this type of technical price reversal many times signals a short-term bottom in share prices, as seen in the five-minute AMZN stock chart below.
AMZN Stock Charts
In a previous post following the latest earnings report from Amazon, I suggested selling the AMZN November $680/$685 call spread, with the notion that AMZN shares were likely to have trouble keeping up the torrid pace of appreciation.
While that spread looks to expire worthless this Friday for a net gain, now that a trading range has been established in AMZN stock, I would look to sell both sides of the market going forward.
In the daily AMZN stock chart, we find major downside technical support at the $600 level, based on the gap following Q3 earnings. Intermediate support is at the $622 level, which was the price area that AMZN has held three times post-earnings. Upside resistance is at the all-time high in the $675 range, which was rejected twice.
Using these technical levels as a guide to strike selection, I would look to position in December monthly options 10 points above resistance of $675 with the short call strike and 10 points below support of $600 with the short put strike. To define my risk, I would buy the next strike out.
In this instance, that would mean selling the Dec $685 calls and buying the Dec $690 calls for a net credit of 95 cents, while selling the Dec $590 puts and buying the Dec $585 puts for a 55-cent net credit.
The combined credit on the trade is $1.50, which equates to a $150 maximum gain. The risk is $350, with return on risk of 53.84%
Upside break-even at December expiration is $686.50, or 6.7% higher than the $643.30 price of AMZN stock at Tuesday’s close. Downside break-even is $588.50, or 8.6% lower. I would look to close out the trade on a meaningful move above the $675 resistance level or below the $600 support level.
As of this writing, Tim Biggam had no position in the aforementioned securities. Anyone interested in finding out more about option-based strategies or for a free trial of the Delta Desk Research Report can e-mail Tim at tbiggam@deltaderivatives.com.
