Amazon (NASDAQ:AMZN) stock is the gift that keeps on giving — if you’re on the long side that is. For a decade, shorts have tried to circumvent AMZN’s prospects based on profitability metrics, but the AMZN stock continued to rise relentlessly. Now, it’s joined Apple (NASDAQ:AAPL) in reaching the $1 trillion market cap — albeit during intraday trading– and Amazon stock has proved all doubters wrong.
Amazon is the perpetual startup company. This is a notion that I’ve been arguing for years. It keeps reinventing new ways to grow their sales from completely new ventures. Yes, Amazon spends a lot of money to do it but that is what startups do.
And in this case, AMZN does not lose money while doing it. The company generates enough cash to test many new ventures and throw away the ones that are not viable. So shorting it would be a short on the stock market itself. Amazon is a momentum stock so it will run downhill faster. But that goes the other way around also; hence the incredible exponential chart.
Today I reinstate a winning strategy that works in this bullish macroeconomic environment. We still have favorable tax laws and mild interest rates, so businesses should continue to profit through 2018 and perhaps most of 2019. So the upside potential for stocks is more likely than a full-blown correction.
Within that thesis, my bet today is that AMZN stock will do well through 2018. I am a cautious investor so I am not going to risk $2,000 per share to buy shares and hope for favorable headlines on tariffs for example. Instead I use options again where I can build a buffer between current price in my level of risk.
In order to retain my maximum gains all I need is for Amazon stock to hold support into year-end. Which means that I have more faith in downside proven support than upside hopium. Should a rally into my profits will come in faster.
And the worst-case scenario I end up owning Amazon shares at a 24% discount from current price. Long term, I am confident that I would be able to manage out of those for a profit.
I’m not required to hold these positions open through expiration. I can close any of them at any point in time for partial gains or losses.
AMZN Stock Trade Ideas
The Trade: Sell AMZN DEC $1515 put for $12. Here I have a 85% theoretical chance of success. Otherwise and if price falls below it then I would suffer losses below $1503.
Selling naked puts carries big risk especially for a momentum stock like AMZN and near all time highs. To mitigate it sell a spread instead.
The Alternate Trade: Sell the AMZN DEC $1520/$1515 credit put spread where I have about the same odds of winning but with much smaller risk. Yet the spread would yield 12% if successful.
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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.