After trading up to the $1000 level on September 13, shares of Amazon.com, Inc.(NASDAQ:AMZN) have fallen over 6%, dropping eight out of the past nine days.
Part of the selloff is likely predicated on a slightly more hawkish tone out of the Federal Reserve regarding rate hikes. The sharp drop, however, also makes AMZN stock more attractive at current lower levels. I expect Amazon to consolidate and head slightly higher over the coming weeks.
Attempting to value Amazon using traditional metrics is difficult, if not impossible. A recent InvestorPlace article from Portfolio Grader just upgraded shares of AMZN from a “hold” to a “buy” using their proprietary methodology.
InvestorPlace contributor Vince Martin does a nice job drilling down into the fundamentals as well. Forty-one of the 47 analysts covering AMZN stock rate it as either a “buy” or a “strong buy” with an average price target of $1147.28.
In reality, momentum and high growth stocks like AMZN trade more on technicals than fundamentals anyways. After the recent downdraft, Amazon shares are now trading near the critical support area of $935. This level corresponds to the breakout in Amazon following a better than expected earnings report in late April. The $935 support has held on several occasions, including the past two days.
Amazon stock is also getting oversold on a nine-day RSI basis with readings below 30. Previous times when Amazon reached similar oversold readings pinpointed short-term lows in AMZN.
Click to EnlargeAs an options analyst and trader, I rely heavily on implied volatility (IV) to both structure trades and provide directional insights.
The swift fall in Amazon shares over the past nine days has driven IV to the highest level since the last earnings release on July 27. A high comparative level of IV is a normally reliable indicator of a short-term bottom in the stock. It also means that option prices are more expensive, favoring selling strategies.
To position for a period of consolidation in Amazon, selling a guardedly bullish put credit spread makes intuitive sense.
AMZN Stock Trade
Buy AMZN Oct $915 puts and sell AMZN Oct $920 puts for a $1.20 net credit
Maximum gain on the trade is $120 per spread with a maximum risk of $380. Return on risk is 31.57%. The short $920 put is structured well below the crucial $935 support level and provides a 2% downside cushion to the $938.60 closing price of Amazon stock.
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 timbiggam@gmail.com.
