My thesis today is simple. Amazon.com, Inc. (NASDAQ:AMZN) has been the cream of the froth on Wall Street. Experts insist that it’s a bubble. I sell risk into their fears for easy profits to create income from nothing.
Last week, AMZN reported earnings and Wall Street absolutely loved it. The upside move was monstrous, and for a stock this size it’s mighty impressive. The critics were speechless. The report was good enough to infect most other mega-cap tech to also rally just in infectious exuberance.
Facebook Inc (NASDAQ:FB), for example, rallied 4% on no news of its own.
Forever, the knock from Wall Street experts on AMZN has been that it runs thin margins. To that I say they are looking at this from the wrong perspective. Jeff Bezos created the ultimate startup. They have been in continuous start-up mode for over a decade. When evaluating a new company, I don’t ask them to show me profitability. They should be focused on growth.
AMZN has that in droves.
Click to Enlarge In addition, the company is profitable, so that argument still lingers on perception only, not reality. In fact, the trajectory of return-on-assets (from flat to 3.6) has been steadily rising.
Compare that to AAPL which is arguably the standard for all companies. Its ROA, though much higher than AMZN, is headed the wrong way. Its trajectory under Tim Cook has been steadily declining. It fell 45% from 2012 to 2016. So I argue that Bezos is using his money wisely to dominate new lines of business.
If equity markets don’t crash, AMZN stock is headed higher in spite of all the naysayers who keep doubting its variability. You can’t do what AMZN has been doing for decades and still be called unsustainable. Clearly it is.
So today, I am not arguing for the sake of value from the traditional sense. I am betting that the value lies in the longer-term trajectory of the stock. So I want to bet there is support in the stock price over time because enough investors believe in it like I do and they will perceive value on dips.
This is a longer-term bet which is similar to the tradition credo of “investing for the long term” only using modern ways through AMZN options.
AMZN Stock Trade Idea
The Trade: Sell the AMZN June 2018 $730 put and collect $4 per contract to open. Here I have an 85% theoretical chances that price will stay above my strike so I can retain maximum gains. Otherwise, I will suffer losses below $726.
Selling naked puts carries big risk, especially for a stock as frothy as AMZN. For those who want to mitigate it, they can sell a spread instead.
The Alternate Trade: Sell the June 2018 $730/$740 AMZN credit put spread where I have about the same odds of winning but with much smaller risk. Yet the spread would yield 10% if successful.
I don’t like to chase upside prices but in this case, either of these trade setups leave room for a 30% correction in Amazon stock.
Ultimately, regardless of how careful I am, investing in stocks is fraught with danger, so I never risk more than I am willing to lose
Get my newsletter for free here. 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 as @racernic on twitter and stocktwits.
