Another trade war headline, another overnight plunge in equity futures. Traders tiring of the market merry-go-round should take heart. You can use the volatility to your advantage using options on market leaders like Amazon.com, Inc. (NASDAQ:AMZN).
Indeed, the AMZN stock dip looks rip for some bottom-fishing.
Like the rest of its sector, Amazon.com shares have suffered under the reign of our new high-volatility overlords. From peak-to-trough the stock is down 16%. The 20-day and 50-day moving averages have caved along the way flashing warning signs.
While the daily chart has shareholders shaking, the weekly view provides a reason for optimism.
For all its fury, Amazon’s three-week retreat appears nothing more than a garden-variety pullback in the longer-term trend. With a history of gobbled-up dips and a 20-week moving average fast approaching, I suggest prepping bullish trades.
On the options front, premiums are pumped. The blame lies with fear which is driving demand for protection into orbit. The implied volatility rank recently tagged 100% suggesting option prices are the highest they’ve been all year long. And while that’s a bummer if you’re a buyer, it’s a reason for celebration for sellers. The pay-days for short premium strategies have become much more lucrative.
AMZN Put Spreads Beckon
The rich price tag of Amazon stock makes selling puts outright a challenge. The margin requirement is simply too burdensome. That’s why I suggest using a bull put spread instead.
Sell the May $1170/$1160 bull put for $1.50. Consider that it’s a bet that Amazon stock will sit above $1170 at expiration. To fall below that level, the stock would need to turn it’s 16% drawdown into a hold-me-mommy 28% crash. It’s possible, yes. But certainly not probable.
The max reward is $1.50 and the max risk as well as initial cost is $8.50.
As of this writing, Tyler Craig didn’t hold positions in any of the aforementioned securities. Want more education on how to trade? Check out his trading blog, Tales of a Technician.
