Amazon.com Inc. (NASDAQ:AMZN) has certainly been on quite a run lately, making new all-time highs daily and moving higher by 59% since making a low on February 9 at the $480 level.
This easily outpaces the 20% move by the S&P 500 in the same time frame.
AMZN stock option prices, as measured by implied volatility (IV), have fallen dramatically in this same period, now trading at the lowest levels of the year. Plus CEO Jeff Bezos just sold a million shares of AMZN stock last week and Wal-Mart Stores, Inc. (NYSE:WMT) just bought Amazon competitor Jet.com for $3.3 billion.
So now is absolutely an opportune time to fade the rally and take a dirt-cheap bearish put position to play for a pullback in Amazon stock.
AMZN Stock Charts
Click to Enlarge I try to listen to the market and look at price action as a basis for my trading decisions. Yesterday’s price action in Amazon stock was telling, with AMZN breaking out early in the day to trade at a new all-time high of $772.60, only to subsequently pull back sharply to close near the lows of the day at $768.31.
While still an all-time closing high, it certainly was a less-than-enthusiastic move. This gravestone doji pattern is many times indicative of a topping formation in the stock.
Click to Enlarge Of the top 50 stocks by market cap in the S&P 500, AMZN has been far and away the best performer over the past 12 months, moving higher by 47%. This compares to an average gain of 7.1% for the top 50 market cap stocks overall and a 6.7% gain for the Dow Jones Industrial average in the same period.
This type of insane outperformance cannot last forever, so a period of underperformance is likely in order for AMZN stock. Plus having the fifth-biggest market cap stock in the U.S. trading at a 191 P/E ratio seems a tad extreme to me.
As an option analyst, I always listen to the options market as well in formulating my decision. Implied volatility (IV) is telling me to be concerned, with current levels of IV at only 3%. Options are dirt cheap and complacency reigns.
Click to Enlarge Looking at IV over the past year, it has only been lower than the current levels for one brief period. That period marked a significant short-term top in AMZN stock.
So with option prices uber inexpensive and AMZN stock looking a little tired from a technical perspective after a massive rally (not to mention the CEO selling shares and Walmart joining the competition … and that pesky 191 P/E), a put diagonal play makes probabilistic sense to me.
AMZN Stock Trade Idea
Buy to open the AMZN September $750 puts and sell to open AMZN August $740 puts for a $9 net debit.
These are both the regular monthly options. The spread is 22 deltas net short at inception, which is equivalent to being short 22 shares of AMZN per each spread.
The risk is limited to $900 per spread. Ideally AMZN closes near $740 on August expiration for maximum gain.
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 tbiggam@deltaderivatives.com.
