Now Is the Perfect Time to Short Amazon.com, Inc. Stock

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AMZN stock - Now Is the Perfect Time to Short Amazon.com, Inc. Stock

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After starting the year with nine straight up days, shares of Amazon.com, Inc. (NASDAQ:AMZN) have finally run into some resistance. The $1300-level looks like an area where the bulls are starting to question just how much further AMZN stock can go.

Given the negative technical backdrop and the ongoing absurd valuation metrics, I expect Amazon stock to have difficulty moving appreciably higher over the coming weeks.

The news out this morning that Amazon will be raising the price of Amazon Prime by $2-per-month (from $10.99 to $12.99) looks to be providing a short-term lift in the stock. It’s important to note that the annual rate will remain the same at $99-per-year, so the impact will marginal at best to the bottom line.

AMZN earnings are due Feb. 1 with expectations of $1.94 in earnings and roughly $60 billion in revenue. The current price-to-earnings ratio stands at over 300X, while the forward P/E for 2019 stands at nearly 90! Certainly valuation has not been a major factor for Amazon investors to date, but at some point price does matter.
Momentum and growth stocks like Amazon trade much more on technicals than fundamentals. The technicals, however, are looking decidedly less bullish at current levels. Amazon stock is getting extremely overbought with the RSI recently over 80. Previous instances over the past year when the RSI pierced the 80-level proved to be significant short-term tops in AMZN stock.
Amazon stock had an incredible start to 2018, rising for 9 consecutive days from the 2017 close of $1,169. 47 to the Jan. 16 intra-day high of $1,339.94 — an over 14% gain in the third-biggest stock in the S&P 500.
The price action from Jan. 16 points to a key reversal day, with AMZN making a new all-time high only to pullback sharply and close lower on the day. This pattern is indicative of an exhaustion in the rally, especially given the magnitude of the move higher.
Amazon options are trading at the 97th percentile of implied volatility (IV), which means that option prices are extremely expensive on a comparative basis. This favors option selling strategies, so to position for a stall-out in the rally in AMZN stock, a bearish call credit spread makes intuitive sense.
Earnings are due Feb. 1, so I want to make sure the options expire before then to lessen the risk.

AMZN Stock Trade Idea

Buy the AMZN Jan 26 $1332.50 calls and sell AMZN Jan 26 $1330 calls for a 60 cents net credit.
Maximum gain on the trade is $60-per-spread with maximum risk of $190-per-spread. Return on risk is 31.58%. The short $330 strike provides a 2.75% upside cushion to the $1,293.32 closing price of 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 timbiggam@gmail.com. 

Tim spent 13 years as Chief Options Strategist at Man Securities in Chicago, four years as Lead Options Strategist at ThinkorSwim and three years as a Market Maker for First Options in Chicago. Tim makes weekly appearances on Bloomberg TV  “Options Insight”, Business First AM “Trader Talk”, TD Ameritade Network “Morning Trade Live” and CBOE-TV “Vol 411” to discuss everything from volatility and option related.


Article printed from InvestorPlace Media, https://investorplace.com/2018/01/perfect-time-short-amazon-com-inc-amzn-stock/.

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