Shares of Amazon (NASDAQ:AMZN) have been under some pretty severe selling pressure over the past month. Amazon stock has fallen 7.5% since reaching the all time high of $2,039.51 on Sept. 4. AMZN also no longer sports a trillion-dollar market cap after dropping well below the $2,000 level. Certainly some of the recent selling was justified given just how far the stock had rallied and how high expectations had become.
The selling, however, is starting to reach an extreme. Look for a period of consolidation in Amazon in front of earnings.
Click to Enlarge Amazon stock is starting to look attractive from a technical perspective. AMZN is nearing support at the $1,875 area which has held in the past. The 9-day RSI is also approaching the lowest readings in the past year. The prior time when Amazon stock was this oversold marked a significant intermediate-term low in the shares.
The 100-day moving average at $1,814.79 should also provide additional downside support. Implied volatility (IV) has also spiked, another sign pessimism and fear has reached extremes.
In my previous analysis on Amazon stock from Sept. 6, I had a bearish outlook on AMZN given the overextended technicals and fundamentals. A bearish call credit spread with Amazon stock at the $2,000 level was the recommendation at that time. Now that Amazon has dropped sharply, my bearish view has tempered — because price does matter.
IV is elevated owing to the recent weakness, trading at the 77th percentile. This means option prices are comparatively expensive, favoring selling strategies when constructing trades. So to position for support to hold after the recent sharp selloff, a put credit spread makes sense. Earnings are due Oct. 25, so we want the trade to expire before then to avoid any earnings related risk.
Amazon Stock Trade Idea
Buy AMZN Oct $1,795 puts and sell AMZN Oct $1,800 puts for a $1.00 net credit
Maximum gain on the trade is $100 per spread with maximum risk of $400 per spread. Return on risk is 25%. The short $1,800 strike price is below the 100-day moving average and provides a 4.75% downside cushion to the $1889.65 closing price of Amazon stock. The impending earnings report may also serve to dampen short term volatility in front of the release.
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