I’ve always argued that Amazon.com Inc. (NASDAQ: AMZN) is a proven winner that is not overvalued. This has always been an inflammatory statement to most investors.
My point is that AMZN is the ultimate startup that doesn’t quit. It continuously outperforms for its customers on Main Street and its investors on Wall Street. AMZN stock price’s meteoric rise draws a ton of haters leaving a stream of dead short ideas in its wake.
If you’ve been long AMZN stock then you’ve done well for yourself. Those who insist that it’s headed for a crash have suffered tremendously as the price continues higher on improving fundamentals.
Don’t get me wrong, I love a good short idea but shorting AMZN is not a good short idea. Sure, AMZN’s status as a momentum stock will cause it to fall faster than the general markets in correction periods. But, under the current fundamentals and management, Amazon stock is likely to outperform the market on the upside. It is a formidable foe in any sector it enters. I pity those who have to compete with it.
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It’s not in my DNA to chase rallies fueled by hype, but Amazon stock is completely different. I’ve often seen AMZN mentioned with, or compared to other momentum stocks like Tesla Motors Inc (NASDAQ: TSLA). Saying that these two are the same is completely false.
AMZN is profitable now and generates a ton of cash. Amazon chooses to spend most of it to continue its impressive growth pattern.
On the other hand, TSLA needs several unlikely miracles to happen for it to become profitable. And it’s is burning cash like mad.
Today I want to set up a trade that aims to generate income off AMZN’s price range. This assumes that stocks will remain within the recent range through 2016.
AMZN Stock Trade
There can be many variations of these trades to suit individual tastes and risk tolerance. But the idea is to use the options markets to generate cash through November.
Trade #1: AMZN Nov $900/$920 credit call spread. This is a bearish trade for which I collect $1.95 per contract. Theoretically, I have a 90% chance of success. Potential yield is 11%.
You can hedge this trade with a second bullish one. But don’t do this if you’re already long AMZN stock.
Trade #2 (optional): AMZN Nov $610/$590 credit put spread. This is a bullish trade for which I collect an additional $1.40 per contract. Theoretically this also has a 90% chance of success. Since I can only lose on one side or the other, trade #2 won’t require additional margin.
Taking both trades would constitute an Iron Condor with a 20% potential yield on money risked. I would also have a 17% upside buffer and 20% downside buffers from its current price. This means AMZN stock can rise or fall 17% & 20% respectively before it hits either short leg of my Iron Condor.
And you are not obliged to hold either trades until expiration. You can close either for partial gains or losses at any time.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @racernic and stocktwits at @racernic.
