Are you considering bargain-hunting in Amazon.com, Inc. (NASDAQ:AMZN)? No doubt there’s some evidence of bullishness in AMZN stock, but off the chart, the merchandise still looks questionable. Today, I want to show you how to use options to get the best out of America’s best e-commerce company.
Charts can be useful tools, but they certainly have their limitations. And in some instances, I really question my confidence in them. That sums up how I feel about Amazon stock right now.
There’s decent technical evidence that AMZN has put together an intermediate low. The bottom is the type many investors use for entering into a favored company’s stock on (anticipation of) temporary price weakness.
So what’s my issue with buying Amazon?
All the other bad stuff discussed in early August hasn’t simply just disappeared. A recent huge profit miss, a nosebleed price-to-earnings ratio of nearly 250 and a massive market capitalization approaching $475 billion are reasons at least for pause in AMZN stock. If you’re fully confident, I think you’re too reliant on the price chart.
Amazon’s Weekly Chart
Click to Enlarge
But is it the low?
I’ve already stated I’m not a fan of Amazon shares right now. But also, aside from some bearish market seasonality, technical conditions appear to be shaping up technically despite my cautious stance.
If we’re to believe price is the final arbiter, AMZN stock has offered up a reasonably healthy corrective move of 13%. Also supportive: Amazon shares have formed a bullish engulfing reversal pattern with the backing of an oversold stochastics crossover.
How to Trade AMZN Stock
Courtesy of OptionVue.com
For bullish investors receptive to the price chart and able to look past my voiced concerns, one idea is a modified bullish long call butterfly. With shares at $978.25, I like the Oct $990/$1,030/$1,050 for a $10 debit.
Similar to a traditional long butterfly, the spread will collapse to zero at expiration if the price falls below the lowest strike. In other words, you would lose the $10 debit if AMZN stock falls below $10. The risk is equivalent of just more than 1% of Amazon’s current share price. That should be attractive to most traders.
What’s also nice is the spread only needs a fairly modest gain of 2.25% to breakeven. Even better, this combination can produce a max profit approaching $30 at $1030 on expiration if AMZN stock is unusually cooperative.
Saving the best for last and unlike a regular butterfly, in the event AMZN really reasserts its uptrend, this trader is able to keep a profit of $10.00 above the highest call strike due to varying widths of the embedded verticals.
Investment accounts under Christopher Tyler’s management do not currently own positions in any securities mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits and feel free to click here to learn more about how to design better positions using options!
