I was wrong last month when I wrote bullishly about Amazon.com, Inc. (NASDAQ:AMZN). I highlighted the fact that Amazon is shifting back into spending mode, and noted that the typical rules regarding top-line earnings don’t usually apply to the company. After all, Amazon has a long history of cannibalizing earnings in the name of growth.
As it turns out, there are more than a few AMZN investors that are quite a bit unnerved by the spending spree. And, as a result, the Sept $990/$1,000 bull call spread I recommended last month is on the verge of falling flat on its face.
AMZN has until the end of the week to rally to $1,000, which seems unlikely at this point. Luckily, traders adopting this strategy will only lose their initial investment. Depending on how much you invested, this could still be painful.
Meanwhile, the Sept $900 put sell position (the second trade I offered up on AMZN stock last month) is well positioned to close out of the money, allowing traders to keep the entire premium received.
A New Outlook on Amazon
Looking ahead, I am shifting my stance to bearish on AMZN stock. The reasons hit all three of the trading aspects I follow: technical, fundamental and sentiment.
Technically, AMZN stock is down more than 6% since Amazon’s late July earnings report. The shares broke through not only the $1,000 level, but also breached their 50-day moving average and briefly broke below $950.
Last week, bargain hunting helped propel Amazon higher off its near-term lows, but that rebound was capped by the stock’s 50-day moving average. In other words, traders are reluctant to push AMZN stock much higher at the moment, despite the shares’ decline.
The reason for this ties directly back to Amazon’s quarterly earnings report. AMZN stock enjoyed an impressive run higher after Amazon posted net income growth for eight straight quarters. That winning streak ended in July, as Amazon once again shifted back toward heavy spending on content for Amazon Prime Video and its $13.7 billion acquisition of Whole Foods Market.
And if you think Amazon’s spending on Whole Foods is finished, you’re in for a surprise.
On the sentiment front, Amazon went from ruling the world in the financial media several weeks ago to struggling for market share in both India and China. What’s more, Alibaba Group Holding Ltd (NYSE:BABA) is now encroaching on Amazon’s home turf stateside.
More traditional sentiment indicators remain largely bullish, however, and that could be bad for AMZN stock. Currently, 40 of the 46 analysts following AMZN stock rate the shares a “buy” or better, according to Thomson/First Call — a reading that is up from 39 out of 44 in August. Meanwhile the 12-month consensus price target has risen to $1,145.89 from $1,140.39 last month.
It’s notable that these increases came despite AMZN stock’s poor price action.
Turning to Amazon’s options outlook, we finally see some negativity filter in. The October put/call open interest ratio rests at a bearish leaning reading of 1.13 — though this reading, too, is down from August’s 1.21.
Overall, October implieds are pricing in a potential move of about 5.3% heading into expiration. This places the upper bound at $1,026.11 and the lower bound at $922.81 from today’s open. Once again, short-term support lies near $950, though with last month’s breach, support in the area should be thinner. On the upside, the 50-day moving average is near $985, with additional resistance at $1,000.
2 Trades for AMZN Stock
Put Sell: While I believe Amazon is in for more weak price action, we are heading into the holiday shopping season. As such, AMZN stock will have more upside bias than usual, potentially overriding fundamental concerns for the time being.
Traders still looking to bank on weakness in the shares might want to consider an Oct $900 put sell. At last check, the Oct $900 put was bid at $6.40, or $640 per contract.
As with all put sells, traders will keep the premium received for entering the trade as long as AMZN trades above $900 through Oct expiration. If AMZN were to trade below $900 prior to expiration, then you could be assigned 100 shares of AMZN stock per contract sold at a cost of $900 per share.
Bear Put Spread: If you’re looking for a more bearish play on AMZN stock, then an Oct $950/$960 bear put spread has potential. At last check, this spread was offered at $3.85, or $385 per pair of contracts. Breakeven lies at $956.15, while a maximum profit of 6.15 cents, or $615 per pair of contracts — a potential return of about 56% — is possible if AMZN stock closes at or below $950 when October options expire.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
