September’s tech wreck hasn’t been kind to Amazon (NASDAQ:AMZN), particularly compared to other megacap names. With Thursday’s 2.25% slide, AMZN stock has now officially retraced nearly $550, or 15%, from its peak.
Along the way, Amazon cracked both the 20-day and 50-day moving averages. With technical deterioration mounting and bulls pulling in the horns, you’d be forgiven for wondering if it was time to abandon ship.
The answer is no, and I’ll explain why. After that, I’ll show you how you can dip your toes in the water if, like me, you see the present dip as a buying opportunity.
Down, but Not Out
To put the correction in proper context, let’s start with the weekly time frame. Even though a 15% drop and breaching the 50-day is no mere flesh wound, let’s not forget just how far AMZN stock has come since its fateful March 16 lows.
We’re talking more than 100% of gains in just five months. And that came without hardly any pullback along the way. The e-commerce king was more than due for some backing and filling, so spectators shouldn’t be surprised.
The three-week retreat appears as nothing more than a garden variety retracement on the weekly chart. We haven’t even reached the rising 20-week moving average yet. We also haven’t breached any weekly support zones, so the long-term uptrend is very much intact.
Bears will find more evidence supporting their cause on the daily time frame. Unlike every other retracement since March, this one cracked multiple support zones. Moreover, those floors have turned into ceilings rebuffing recovery attempts. For instance, check out the moving averages (red and blue line) over the past two weeks. Both rally attempts were denied at their doorsteps, resulting in lower pivot lows.
What’s more, September has seen no less than five distribution days in the volume panel. Institutions are leaning heavily on the sell button, and it’s making it hard for recovery attempts to have staying power.
But if the weekly trend has its say, the downside momentum should slow and this dip should ultimately prove a buying opportunity. We’re sitting at the big round number of $3,000, so there’s a chance this is the spot buyers finally return.
AMZN Stock Options Trade
Demand for options is on the rise, and the implied volatility is officially high at the 53rd percentile. That means premiums are ripe for the selling. Put sellers can capture more premium than usual while going further out-of-the-money to create a high probability of profit.
Selling put spreads is my preferred strategy given AMZN stock’s sky-high share price. The bull put allows us to craft a limited risk and low-cost trade that will profit as long as Amazon doesn’t fall too much further.
Here are the Greek characteristics of the strategy:
- It’s positive delta and will profit from a rise in the stock;
- It’s positive theta and benefits from the passage of time; and
- It’s negative vega and will profit if implied volatility falls.
The Trade: Sell the October $2,600/$2,590 bull put for around $1.25.
Consider it a bet that AMZN stock sits above $2,600 at expiration. If it does, you’ll pocket the $125 max profit per contract. To incur the max loss, the stock would have to fall below $2,590 over the next month, which is extremely unlikely. Furthermore, you could reduce the loss by merely exiting if we break $2,600.
To increase the odds of success, consider exiting once you capture $1.00 of the potential $1.25.
On the date of publication, Tyler Craig did not have (either directly or indirectly) any positions in the securities mentioned in this article.
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