Amazon.com, Inc. (NASDAQ:AMZN) is the mother of all momentum stocks, and this morning’s move on the earnings headline is just an example why. This is a stock that for decades has left a long line of dead bears behind. But the momentum can cut in either direction case in point the recent Donald Trump tweets. The problem for the shorts is that AMZN usually has more upside reasons to run than down.
The bear thesis on it has always been that management spends too much money. The basic premise for that argument is fundamentally flawed. Amazon stock is a perpetual startup so investors need not worry about the bottom line. They do spend a lot of money but only to continue the massive growth trajectory.
Even then, they are indeed profitable and can become even more so should the economy slow down or if they just want to prove a point, like they did in this report. In addition, they announced last night that they would raise the Prime membership from $99 per year to $119. This is a $2 billion annual run rate increase that flows straight to the bottom line.
Fundamentally, AMZN stock is indeed expensive with a 300 price-to-earnings ratio, but not if I consider the neck-breaking growth rate. And therein lies my long-term bullish thesis for this monster.
The perfect example that justifies the spending lies in the success of AWS. Imagine if AMZN CEO Bezos yielded to Wall Street pressures to reduce spending and nix the AWS project. That would have been a colossal mistake, since AMZN now owns “the cloud” and AWS is still growing at a 50% rate.
I am a value trader and AMZN is hard to justify from that perspective … but it’s equally hard to stay out of the stock all together. I am lucky to have just locked in profits before the earnings. I rolled my risk into a long QQQ as an indirect play on AMZN earnings. This way I reduced my exposure away from one single headline.
Today I reengage long and with plenty of room for error. Using AMZN options, I am chasing the upside hopium because I have faith that Bezos will have another ace up his sleeve this year or next. Nevertheless, I will mitigate my risk by eliminating my out-of-pocket risk. To do that, I sell downside risk against bears who continue to be wrong.
Amazon Stock Trade Ideas
The Bullish Trade: Buy the AMZN Jan $1,650/$1,660 debit call spread for $3.80. This is an opportunity to double my money if the price rises through my position by next January.
The Bank: Sell the AMZN Jan $1,150 put. This is a bullish trade for which I collect $25 to open. I have an 85% certitude that I will retain maximum gains. But if price falls below my strike then I own shares at that price.
The net results of these trade is a net credit. So as long as Amazon stock stays above my puts then any premium I recover from selling the calls will be pure profit.
The macroeconomic thesis is the driver of all conviction trades. So click here for a quick review of what’s driving this one and to get my free newsletter.
Learn how to generate income from options 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.