We all know that the equity markets just got rocked hard recently. After their violent bounce off the Feb. 9 lows, stocks fell into an abyss especially last week. But throughout, the surprising part to me was how well Amazon.com, Inc. (NASDAQ:AMZN) held up, and therein lies my opportunity.
Usually, when stocks are tested, I look for leaders like Apple Inc. (NASDAQ:AAPL) for clues on how the indices will do. This time it was a momentum stock, AMZN, that gave me hope. So if investors were still hanging on to perceived frothy stocks then headline fears are overblown. If markets truly feared the fundamental bullish thesis then they’d ditch risky stocks and hold on to value.
Fundamentally, Amazon stock is not cheap from the price-to-earnings perspective. Yes, the P/E ratio is enormous but this is a growth company. In fact I argue that this is a startup company. Management successfully enters new markets every year. Investors don’t look for profitability in startup businesses, they look for growth, and Amazon has it in droves.
This is not to say that Amazon is bleeding cash. In fact it’s profitable, just not as profitable as it could be and that is by design. They invest their profits back into growth. This is how they became the king of the cloud, and voice-activated assistants just a name two. I believe that AMZN is set to continue its dominance in the new-tech world in which we live.
Technically, AMZN stock held up relatively well, which is an indication that the sellers are weak. Combine that with an overall bullish macro thesis, I bet that AMZN will be higher at the end of the year then now.
To implement my strategy I will not risk $1,500 per share to buy them outright with no room for error. Instead, I will use options to reduce my out-of-pocket risk yet set myself up for profits in the months to come.
Amazon stock rallied almost 10% off of the $1,450 neckline so I expect that area to provide some support for the next few weeks. Below $1,400 the stock rallied 20% violently which tells me that there should be strong bulls that would step in and buy it should it fall below that line. Below that, $1200 per share was the platform from which the stock spring last year.
The bottom line is that AMZN is a company that continues to prove its worth by maintaining an incredible growth rate into a multitude of verticals and I want to be long that effort. There will be bumps along the road and that’s why this strategy works best for me by eliminating the out-of-pocket expense.
Amazon Stock Trade Idea
The Bank: Sell AMZN SEP $1,300 put and collect $50 per contract to open. I have a 75% theoretical certainty that I retain maximum gains. Otherwise, I will accumulate losses below $1,250.
Selling naked puts carries big risk especially for a stock as expensive and as volatile as this. For those who want to mitigate it, they can sell a spread instead.
The Alternate Bank: Sell the AMZN SEP $1,320/$1,300 bull put spread. Here my risk is smaller in size.
The Bet — Optional and Can Be Done at a Later Date: Buy an AMZN debit call spread for May $1550/$1555 for about $2 per contract. Here I have a chance to double my money if AMZN rallies through my spread.
Since I can eliminate my out-of-pocket expense as long as AMZN stays above my sold puts, then any profits I recover from selling the debit call spreads would be incremental profits.
Subscribe to my YouTube channel for free newsletter & content 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.
