After making a new recent low of $474 on Feb. 9, Amazon.com, Inc. (AMZN) rallied over 100 points to close at $580.21, a move of 22.4% in just 15 trading days. I think this move is getting a little extended and AMZN stock is due for a pullback.
Click to Enlarge AMZN stock is trading above the 200 day moving average of $546.29, but still below the 50-day moving average of $584.88.
Trading up to the 50-day moving average Wednesday before pulling back indicates that Amazon stock may find some resistance moving through this level.
Amazon stock is approaching an overbought level on a 9-day RSI basis, with a reading near 70. Implied volatility is trading at the lowest level of the year. This heightened level of complacency is many times a reliable contrary indicator.
Amazon stock also had a doji candlestick yesterday, with the stock closing virtually unchanged. This type of price action is a key trend reversal indicator, also pointing to a potential pullback in AMZN stock.
Click to Enlarge There is also major overhead resistance at the $600 level, with Amazon stock having mostly filled in the gap from last October.
Combined, these factors portend a looming retracement of Amazon’s recent rally.
Given that implied volatility is at the lowest level of the year, a strategy that benefits from a pickup in IV makes sense to me. While I don’t expect a complete collapse in AMZN stock, certainly a retest of the 200 day moving average around the $550 area would not be unwarranted.
That said, a put calendar spread is my preferred way to play the pullback.
AMZN Stock Trade
Buy AMZN March $550 puts while selling the March 11 weekly $550 puts for a net debit of $2.70 at last check.
The total cost on this trade is $270 per spread, with the short strike structured right near the 200 day moving average. Ideally, AMZN closes near $550 on March 11 weekly expiration, and you realize the maximum potential profit.
Click to Enlarge The trade suffers if AMZN stock rallies sharply or falls substantially. For illustrative purposes, the risk profile for a five contract spread is shown adjacent. The blue line indicates the probable profit and loss at March 11 option expiration.
I would look to revisit the trade next week as March 11 expiration approaches to either trim out some gains or reduce some risk.
As of this writing, Tim Biggam did not hold a position in any of 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 email Tim at firstname.lastname@example.org