Investors continue to buy what Amazon.com, Inc. (NASDAQ:AMZN) is selling following a massive earnings beat. I like what I see in AMZN stock — including a substantial “Howwegotcha” candlestick in the mix — and I think it’s time to play. And we don’t even have to pay.
Let me explain.
If you buy what Amazon.com sells online, you’re not alone. The company is selling to more people globally, and maybe beyond, than ever before. As well, Amazon continues to top an optimistic Street’s forecasts for the retail and technology giant.
But have you thought about joining the Peter Lynch school of investing and actually own what you spend on? Well, maybe you should.
In truth, while Peter Lynch likely wouldn’t touch shares based on his buying principles, I’m happy to make the argument for AMZN stock based on a number of other criteria.
The Daily Chart
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The 4/4 notation on the provided chart marks the prior analysis.
Amazon made a final hurrah, then proceeded to digest the condition for three weeks before breaking out in a much stronger technical position from the company’s earnings.
The post-earnings price action in AMZN stock is once again overbought on a daily time frame, if you respect Bollinger Bands and the stochastics indicator. However, what I’ve coined as a “Howwegotcha” candle pattern does lend itself to a potentially strong bullish resolution without shares necessarily pulling back first.
In this instance, this is a two-candle pattern that formed when a very bearish-looking candle was countered the next session with an equally strong bullish reaction. With three subsequent trading days of inside price action, a move above the highs should generate bullish momentum as investors chase Amazon stock higher and bears rush to cover.
What if the pattern doesn’t trigger, or even fails?
For now, given the obvious uptrend, as well as likely support from the large cup-with-handle base, you might also appreciate the idea of buying shares at a discount.
How to Trade AMZN Stock
Is there a way to put these two seemingly different buying styles — buying momentum, and buying Amazon at a discount — to work?
You can with options.
After reviewing the options board, I like a no- to little-cost spread package where we purchase an out-of-the-money “targeted” long call butterfly financed by an out-of-the-money credit put spread.
AMZN stock trades at $938, so one combination that looks serviceable is buying the Jun $970/$990/$1010 call butterfly and selling the Jun $880/$860 put spread for even money.
What does this do?
On the upside, if the Howwegotcha pattern is confirmed and Amazon shares begin to rally, the position makes money $1-for-$1 with shares above $970. It offers a max profit of $20 if AMZN sits at $990 at expiration.
The upside profit range spans the width of the butterfly, but doesn’t cost the trader any money if Amazon shares fail to land inside the spread or if the stock overshoots the targeted butterfly.
On the downside, should Amazon move lower during the life of this packaged spread, the trader is positioned to get long shares through assignment below $880. This amounts to a discount and margin of safety of 6% from the current share price.
Because this entry into AMZN stock is set up as a $20-wide vertical spread, you keep your risk defined to roughly 2.25% of the share price. This also sets up buying shares at the 50-day simple moving average, where we can reasonably assume support exists.
Lastly, if Amazon really takes it on the chin and collapses below the spread, a trader using this strategy could end up buying shares a good deal cheaper with a lot less risk.
Investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT.
