- Amazon (NASDAQ:AMZN) is trading at levels last seen in April 2020
- AMZN stock is the most oversold it has been in the past 3 years
- Sell defined risk put spreads to get paid now to be a buyer later and lower
Let’s face it. The market is all about the fear factor right now. Fear of higher rates. The fear of a recession or even a depression. Fear of inflation. Combine them all into a fear of stagflation. At some point, though, it is time to keep a level head and face the fear. That moment has arrived in AMZN stock. Time to be a buyer in a low risk fashion.
AMZN stock is trading at the lowest levels since the height of the Covid Crisis in 2020. Shares are down 36% this year alone and over 40% from the all-time highs last July. While the last earnings report was disappointing, the selling has now gotten indiscriminate and is reaching extremes. As Warren Buffet famously said “Be Greedy When Others Are Fearful.” Certainly the technicals are looking fearful.
Technical Take for AMZN Stock
Virtually every technical indicator is at the most extremely oversold reading in the past several years. 9-day RSI went below 20. Bollinger Perecent B was deeply negative. The Detrended Price Oscillator hit the -1000 level. Not sure I have ever seen that in all my years of trading and technical analysis. The prior times these indicators even came close to approaching these readings marked significant short-term lows in AMZN stock.
Look for a bounce soon in Amazon. When it comes it may be fast and furious. The initial price target would be back towards the $2,500 area, which equates to the earnings gap.
Undoubtedly the analysts are almost all bullish on Amazon. TipRanks shows Amazon as a strong buy. 36 of the 38 analysts covering AMZN rate it as a buy with only one hold and just one sell. The average target price is $3,695.95 which equates to nearly 70% upside. Even the lowest price target is a still rather respectable $2,800.
InvestorPlace contributor Chris Tyler has a bullish view as well regarding AMZN stock. He took a deep dive into the positive Amazon Web Service side of the earnings disappointment and noted the impending 20-1 stock split and $10 billion buyback program as more reasons to like Amazon. His recommendation was to use a vertical call spread to get long Amazon instead of buying the expensive shares. Just 100 shares of AMZN stock would require a capital commitment of over $200,000.
Certainly spread strategies that incorporate some option selling are favored in the current volatility environment. Implied volatility (IV) now stands at the 100th percentile. This means option prices haven’t been this expensive in the past year. So, to position to be a buyer on the next leg lower, a defined risk bullish put credit spread makes probabilistic sense.
This is a less aggressive and lower risk way to get long AMZN stock. I think that viewpoint is appropriate given the carnage witnessed recently in the market. Plus a 25% return in little over a month isn’t too shabby. You don’t need to have AMZN stock head higher from here, you just need it not to go down more than 11%.
How to Trade It Now
Sell AMZN June $1,850/$1,840 put spread for a $2.00 net credit.
Maximum gain on the trade is the premium received of $2.00 per spread. Maximum risk on the trade is $8.00 per spread. Your potential return on risk is 25% if AMZN closes above $1850 at June expiration.
The short $1850 put strike provides a 11% downside cushion to the $2,107.44 closing price for AMZN stock. Safety pays in several ways with a bull put spread trade on AMZN stock.
On the date of publication, Tim Biggam did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.