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Profit with Spreads While Amazon Snoozes

Amazon (NASDAQ:AMZN) stock has gone sideways for 10 months now. Were it not for the doubling in the year that preceded it, I might have sympathy for shareholders tiring of the lack of progress.

smartphone with Amazon (AMZN) logo displayed on screen
Source: Volodymyr Plysiuk / Shutterstock.com

In today’s article, we’ll take a fresh look at the technology sector’s performance, share what might finally cause AMZN stock to awaken, and identify my favorite strategy for profiting while we wait.

The fallout in growth stocks has been obvious to anyone paying attention to price charts. From a sector perspective, the pain has been most acute in technology and biotech.

Amazon and a suite of other so-called stay-at-home stocks have also come under fire this year. Inflation and higher interest rate fears have removed their tailwind. At the same time, the lower valuation of value stocks has lured money away.

The Silver Lining of Sideways

While the growth factor is on the outs, not all stocks have suffered similarly. For its part, AMZN stock has held up quite well. It momentarily made a new record high following last month’s report and has only come down 9% since. If you want a silver lining to the nearly year-long nap, it’s this – improving valuation.

Consider this in the context of the price to earnings (P/E) ratio. Last year’s boom was a perfect example of a stock’s price outpacing earnings. As a result, multiples expanded, and Amazon became more expensive.

Amazon (AMZN) stock chart with trading range
Source: The thinkorswim® platform from TD Ameritrade

In the year since AMZN first touched $3,200, profits have exploded. The last four quarterly EPS numbers are $5.01, $10.30, $12.37, $14.09, and $15.79. In other words, we’ve seen the “E” play catch up to the “P.” This is a good thing and arguably creates a more sustainable trend.

I can think of two potential catalysts that might finally spark a resumption of Amazon’s long-term uptrend.

The first, and probably most obvious, is a rotation back into tech. The Nasdaq is still struggling below the 50-day moving average. With its daily trend broken, momentum traders have gone elsewhere to play. Until they return, it’s going to be difficult for AMZN stock to recapture the magic.

A second catalyst that might remain a wish is a stock split. Rumors surfaced recently that Amazon might announce a split, but we’ve seen nothing official yet. Such a move would drastically cheapen the rich share price, making it buyable to a whole new class of retail traders. It could also make the e-commerce giant eligible for inclusion in the Dow Jones Industrial Average, a price-weighted Index. Its current constituents range in price from Coca-Cola (NYSE:KO) at $52 to UnitedHealth Group (NYSE:UNH) at $410.

How to Use Score Gains with AMZN Stock Options

While some traders are waiting for Amazon to break through the topside of its range ($3,450) before playing, others are jumping in now with options to game the neutrality. Bull put spreads, in particular, look interesting if you’re willing to bet AMZN stock holds the lower end of its box for the next month.

The Trade: Sell the June $3,010/$3,000 put spread for $1.70 credit.

The max gain is $1.70 and is yours to keep if prices sit above $3,010 at expiration. The max loss (and trade cost) is $8.30. To reduce the risk if tech continues to suck wind and Amazon tumbles, exit on a push below the higher strike of $3,010. That should reduce the loss to only around $2.70.

On the date of publication, Tyler Craig held a long position in KO. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

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Article printed from InvestorPlace Media, https://investorplace.com/2021/05/amzn-stock-profit-with-spreads-while-amazon-snoozes/.

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