As a consumer, I totally understand the love for Amazon (AMZN). And on occasion, I’ve totally wanted to shop for AMZN stock, but this just isn’t the time.
In fact, AMZN stock is looking more and more like a “prime” short at current levels.
True, AMZN stock is second-to-one in the S&P 500 this year. Shares of Amazon are up 118% while the market tries to hold onto gains of less than 1% excluding dividends.
Only fellow FANG stock Netflix (NFLX) holds a candle to AMZN’s performance with its gain of 160%.
However, there’s a very good reason behind investors’ seemingly insatiable appetite for AMZN stock — the company is well on its way to taking over the planet! Or, at least, that’s what bulls would have you believe.
Last year, of course, was a much different story for AMZN stock.
Less-Than-Prime AMZN Stock
The market’s game of musical chairs made AMZN stock investors feel the pain of missing the broader market’s own solid rally of 11%, sans dividends, while Amazon shares slumped by 22% in 2014.
As we wind down 2015, it would come as little surprise if AMZN stock became a prime short in 2016.
If nothing else, investors should finally recognize Amazon as a wildly-overvalued stock and take some profits. The overbought price chart should do wonders for waking up a hibernating bear population and shaking down bullish investors in AMZN stock.
AMZN Monthly Stock Chart
Don’t believe me? Take a look at the monthly view of Amazon.
I’ve annotated a Fibonacci-inspired two-step or mirror move wherein leg AB = CD in dollar terms. The completion is a sign that AMZN stock may have run its course. Secondly, the much steeper and speedier completion of leg CD has manifested itself into an overbought condition.
AMZN’s current monthly position is outside of the upper Bollinger Band, which suggests the stock is overbought. As shown, this has historically resulted in profit-taking or corrective action.
Also, the massive widening or spread of the AMZN stock Bollinger Bands hints at a pending pinch or closing down of that aggressive condition. If that happens, price action should be stymied or pressured lower.
Lastly, in the window beneath the price chart, AMZN stock’s RSI is in overbought territory. Again, as the chart shows, this has acted as a decent indicator of pending pressure on shares of Amazon.
AMZN Bear Put Vertical
Admittedly, trends like this sometimes persist longer than one’s wallet is comfortable handling. Given the potential resilience, I like the idea of using a slightly out-of-the-money January $630/$615 put vertical for up to $2.50 per spread.
This Amazon vertical can reach its maximum profit if AMZN stock proceeds to correct by a fairly modest 7.7% over the life of the spread. With Amazon’s beta of nearly 1.5 times the S&P 500, that’s not asking a lot, especially given its year-to-date gains.
This particular AMZN stock vertical also compares favorably to buying an outright January $630 put. Besides reducing time decay and volatility risks, the vertical cuts down dollar risk by $5.75 per contract, which I find plenty attractive.
Bearish profits are slower with this strategy than with the long put position. But a very attractive max payout of $12.50 or return of 500% will reward patient traders — and make AMZN stock bulls jealous.
Disclosure: Investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives 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
