Shares of Amazon.com, Inc. (NASDAQ:AMZN) have been on a major move higher since the beginning of the year, rallying over 26%. This far outpaces the stellar 5.75% year-to-date gain in the Nasdaq 100. Amazon stock, however, is finally beginning to show signs of slowing down. With technicals looking tired and toppy, I expect the rally in AMZN to temper over the short term.
Amazon stock, with a market cap of $725 billion, is now the third-largest stock in the S&P 500. This trails only Apple Inc. (NASDAQ:AAPL) and Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) on a valuation comparative.
Those valuations, though, are beginning to get getting mighty stretched. AMZN stock’s price-to-sales ratio recently breached 4 for the first time over the past five years and are well above the 2.52 average in that time frame.
Of course, a P/E ratio north of 300 certainly doesn’t put Amazon in the value stock camp. Remember, these valuations are for a mega cap stock. At some point fundamentals begin to outweigh faith … and I think we may have reached that point in Amazon stock.
Click to Enlarge The technical picture for Amazon is also beginning to show a loss of faith. The $1,500 level has all the hallmarks of being a double top in Amazon stock. Yesterday’s price action, with AMZN shares breaking past $1,500 briefly only to reverse course and close well below that critical number, is a key reversal day.
This is emblematic of topping pattern, as buyers are finally showing signs of fatigue. Given the magnitude of the rally, I expect Amazon to consolidate over the coming weeks.
Amazon options are still fairly rich, trading at the 68th percentile in implied volatility (IV). This favors options selling strategies when structuring trades. So to position for a period of consolidation in Amazon stock, an out of the money bear call spread makes intuitive sense.
Amazon Stock Trade Idea
Buy AMZN Mar $1,610 call and sell AMZN Mar $1,600 call for a $1.50 net credit
Maximum gain is $150 per spread with maximum risk of $850 per spread. Return on risk is 17.67%. The short $1,600 strike provides a 7.8% upside cushion to the $1482.92 closing price of AMZN.
As of this writing, Tim Biggam did not hold a position in any of the aforementioned securities. Anyone interested in finding out more about option-based strategies or for a free trial of the Delta Desk Research Report can email Tim at timbiggam@gmail.com
