Many would say the bear case for Amazon (NASDAQ:AMZN) is baseless. Ironically though, the AMZN stock chart also appears equally baseless right now. This lack of technical support means it’s time to consider an unorthodox and asymmetrical ‘bear-to-bull’ long put butterfly that won’t cost traders very much at all. Let me explain.
If you’re numbers-crunching kind of investor, AMZN stock’s late July earnings blowout and update on the state of its ever-growing business reach and acumen was nothing short of amazing. Profits toppled Street views, and AWS’s first-mover advantage in cloud storage and other higher margin areas like advertising were a siren song for bullish investors.
But there comes a time when the crowd gets ahead of itself. And that time looks close at hand if we turn our attention to the AMZN stock chart. There all of the so-called ‘baseless claims’ that shares are at risk are more visually apparent — and a real threat for today’s bulls.
AMZN Stock Monthly Chart
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The monthly chart of AMZN stock shows shares have become increasingly popular over this past year. Since breaking out of a smallish flat base last September, Amazon’s technical path to continued highs has turned nearly parabolic.
Bottom line — or in this instance, the squiggly line on the chart — AMZN has hugged the upper Bollinger band for nearly a year, maintained an overbought stochastics setup and doubled in price while absent any constructive base building. You could say shares look technically ‘baseless.’ And if history is any indication, today’s overly-friendly price trend in Amazon is increasingly at risk of a larger correction.
Amazon Stock ‘Bear-to-Bull’ Long Put Butterfly
Having the view that AMZN stock looks great off the chart but at risk technically, getting long exposure at a discount makes sense. I also like the idea of profiting from a bearish move without having the position cost us very much at all in the event I’m wrong. And with an asymmetrical, below-the-market long put butterfly, traders can accomplish exactly that!
One combination of this spread type that’s caught my attention is buying the November $1750 / $1650 / $1405 long put butterfly. So traders would purchase one set of put contracts each at $1750 and $1405 and sell two contracts at $1650.
If purchased the spread with AMZN at $1882.62, this butterfly does a bit better than not costing traders a cent as it’s priced for a credit of about 10 cents. With AMZN at $1901 as of this writing, it’s a cost of about $1.50 for the spread. Investors looking to open at a credit, can wait for a slight dip in AMZN stock.
Above $1750 and failing a correction larger than 9% by expiration this position keeps the tiny credit. That would be pretty nice versus buying shares today if AMZN declines by a few to several percent. But it gets better.
If Amazon corrects into the double digits this spread could explode in price from a 10 cent credit to a profit just north of $100 if a correction of 14% into November expiration developed. The required synchronization of price and time into the $1650 put strike isn’t likely, but it is possible. That’s not all though.
Should AMZN stock head even lower this spread continues to show a profit down to just below $1550. That’s the equivalent of breaking even nearly 20% off Amazon’s all-time-high of $1925. So while many bulls would undoubtedly begin screaming ‘Bear market!’ and question what they were doing when AMZN stock was in the proverbial clouds, this ‘bear-to-bull’ butterfly combination sets the trader up to do the right thing at the right time.
Now that’s a ‘prime’ deal!
Disclosure: Investment accounts under Christopher Tyler’s management do not currently own positions in any securities mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.
