Amazon.com, Inc. (NASDAQ:AMZN) has the most game-changing moves of pretty much any stock I’ve seen.
We’ve seen the company change the way we shop and, more recently, the way we interact with technology in our daily lives. It now dominates the cloud, which is what every technology company is pursuing for years to come.
With Amazon Prime, it also dominates in the subscription model services. Under the leadership of Jeff Bezos, Amazon identified and successfully entered several verticals. With its Whole Foods acquisition, Bezo brought Amazon’s efforts into the brick-and-mortar world. Now Amazon gets the physical location to complement its overall online strategy.
Competitors should be very afraid and not many are out of reach.
Often the headlines that AMZN makes sound ridiculous in the beginning like the drone delivery idea. Only to find out later that they were way ahead of the game thinking outside the box. This excitement and success paid the Amazon stock handsomely. The stock is now in a race to the trillion-dollar market capitalization with Apple Inc. (NASDAQ:AAPL).
Because AMZN is a momentum stock it is very difficult to trade. On the way up, it appears to be ready for a correction at any point in time because of the momentum with which it rises. Conversely, on the way down it looks like it’s headed into an abyss. Either way, most investors are scared out of it or at least they can’t find an easy entry point.
That’s why I use options to trade Amazon stock. There I am less dependent on finding perfect entry points. I can use macroeconomic conditions to forecast a range within which AMZN stock should trades.
Today I sell downside risk to create profits out of what others fear from AMZN this year. This way I don’t even need a rally to profit. As long as proven support holds for AMZN throughout 2018 then I retain my maximum games. Otherwise I get to enjoy an entry point into Amazon stock that is at a deep discount from today’s prices. I am okay with either scenario.
We are currently facing headlines and today we saw one where president Trump upped the ante in the global tariff War by promising more penalties on China if they don’t dial back the rhetoric of retaliation. So there is some risk. But eventually, the news will fade in Amazon will trade based on his fundamentals and they are tremendous.
AMZN is not a cheap stock but when I evaluate a growth company I don’t worry much about that. Wall Street will continue to give AMZN a pass on the price-to-earnings ration for as long they can maintain this hyper-growth. I consider it a perpetual startup but one that is profitable and doesn’t bleed cash.
Technically the fast rise leaves the door open for the risk from a rising wedge so dips will come but they should be shallow for as long as the stock markets, in general, don’t crash.
The Trade: Sell AMZN Oct $1355 put and collect $10.75 per contract to open. Here I have a 85% theoretical chances that price will stay above my level. Else, I will accrue losses below $1344.25.
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 Trade: Sell AMZN Oct $1365/$1360 credit put spread. The spread has the same odds but would deliver 8% yield on risk. Neither trade require a rally to profit.
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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.
