Shares of Amazon.com, Inc. (NASDAQ:AMZN) are finally starting to level off after a monster rally. AMZN is up nearly 25% over the past month and 60% year-to-date. While Cyber Monday sales were assuredly impressive, I think the stock has come a little too far, too fast and is due for a consolidation period.
Certainly any discussion regarding valuations with Amazon are meaningless. A current price-to-earnings ratio exceeding 300 is all you really need to know about it, especially given that Amazon is approaching $600 billion in market cap.
Factor in a price-to-sales ratio now north of 3 and you can certainly make a case that AMZN shares are priced rather richly. InvestorPlace contributor Will Healy takes a deeper look at some of these valuation concerns in his insightful article from last week.
Momentum and faith stocks such as Amazon stock trade on technicals, not fundamentals, anyways. Yesterday was a reversal day as AMZN stock opened higher (and at new highs) only to reverse course and close lower, near the lows of the day. This type of price action is many times indicative of a short-term top in a stock, especially following such a strong rally.
AMZN is also overbought on a nine day RSI basis with a reading over 70. Previous instances when the nine-day RSI reached such extremes marked significant short-term highs in Amazon stock.
The 20 day Detrended Price Oscillator is the most overbought by far over the past year. AMZN is also trading at a huge premium to the 50-day moving average, which is yet another sign of over exuberance.
Option prices are still somewhat expensive with implied volatility (IV) in the 63rd percentile making option selling strategies still viable.
To position for a short-term stall out, an out of the money call credit spread makes sense.
AMZN Stock Trade Idea
Buy AMZN Dec $1240 calls and sell AMZN Dec $1230 calls for a $1.75 net credit
Maximum gain on the trade is $175-per-spread and maximum risk is $825-per-spread. Return on risk is 21.21%. The short $1230 strike is positioned above the all-time intra-day high of $1213.41 for AMZN 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 [email protected]