I have a Waterhouse account that I do my trading with and have been told by Waterhouse for the past month that there are no
available stocks in AMZN to even go short. I'm only surmising but
I would think that once these shares do become available, the
stock will drop like a rock. I look for a peak at 64 before heading down to a more rational $45-$50 level.
Please let me short these shares, Waterhouse!
You must first open an option account (many brokers offer this, but some don't-such as Datek)
Because you can technically lose 100% of your investment (or more!), I do not recommend options to anyone who is not
familiar with the system. You can find many books about options trading in many bookstores. Some are very scientific and extreamly
technically written, requiring an indepth knowledge in statistics and differential equations. Some are, however, extreamly easy to read
and understand. Wade Cook wrote a couple of books on option trading and they are very easy to understand and fun to read.
Before you jump in to the options market, make sure you understand the system and know the related risks and rewards.
I am new to this game, but I look at amazon and it seems a classic case of greed driving a price up, and I think as you do, that it must fall. How can I make these puts that you discribe?
Thanks for the well-written explanation. Admittedly, I had to consult Hull's _Options, Futures, and Other Derivative Securities_ to refresh my memory on some of the terminology. (A GREAT source on options knowledge for others reading this thread, BTW.)
I was bearish on the stock a week ago when I sold the calls, and now I'm even more so even after the pullback. I'll see how it behaves toward the end of the day and consider buying to close my call and putting the profits toward the April puts.
To analyze the "Combine" strategy, it is necessary to introduce a call option into the picture. Let's say AMZN at $50, There is April 50 call selling for 3 points. The put holder could buy this call in order to limit his risk and still to retain the potential for large future profits. If the trader buys the call, he will have following position:
Long 1 April 60 put
Long 1 April 50 call
-----combined cost about 12 points=� 9 points were originally paid for the put, and now 3 points have been paid for the call.
No matter where AMZN stock is at expiration, this compbnation will be worth at least 12 points.! (think about it) In fact,
if AMZN continues to drop, the put will become more valuable and he could build up substancial profits. Moreover, if the
underlying stock should reverse direction and climb substantially, he could still profit because the call will then become valuable.
This tactic is the best one to use if AMZN does not stabilize near $50, but instead makes a relatively dramatic move -either up
or down-by expiration.
Each of these five strategies may work out to be the best one under a different set of cercumstances. But it is interesting to note that the "Spread" is never the worst strategy.
Comparison of each of the 5 tactics
By expiration, if AMZN (1)continues to fall dramatically, the best strategy was "Roll Down", the worst was "Liquidate"
(2) Falls moderately further, best="do nothing", worst="combine"
(3) Remains relatively unchanged, best ="Spread", worst="combine" or "roll down"
(4) Rises moderately, best="Liquidate", worst="Roll down" or "do nothing"
(5) Rises substancially, best="Combine", worst="do nothing"
There are many advanced variations of above put plays with their own merits, but with similar results.
The bottom line is that you should analyze the situation, and decide from the bove menu. I am going with the "spread" for now, and reevaluate as the situation changes and perhaps use an appropriate variation.
I hope this helped,
ps: Go Iowa Hawkeyes!
According to the Black-Scholes model, the option price is determined by the following six variables. They are the stock
price, the option's exercise price, annualized dividend payments, interest, volatility and number of days until expiration. The
high premium you are seeing in AMZN's option is mainly from the volatility + time value of this stock. All of this premium will
eventually disappear by the time the option expires. Thus, it is important to take an action to your AMZN puts before the premium
Before you decide on which puts to buy, you should analyze the current situation. Here is the situation: The AMZN graph had
reached the upper trendline and it was bound to retrieve back anyway. At the top, AMZN announced the less than desirable report and
the sell-off began. By looking at last Friday's graph and its volume, I bet it is very likely to see a negative gap on Monday
and the plunge will continue. I think there is more than 75% chance of AMZN plunging to $50 in a very close future, and less
than $30 might be a possibility in 6 mos. Your analysis of the situation might be different than mine, but let us use the above
model to decide how to play our put game.
The stock price now is $59 1/4. You can pick up an April 60 put (zqnpl) for $9 1/4. When AMZN reaches $50, the put price will be at around $18 1/2. Here you have several options. They are,
1. Liquidate-sell the long put for a profit and do not reinvest
2. Do nothing-continue to hold the long put.
3. "Roll-down"-sell the long put, pocket the initial investment, and invest the remaining proceeds in out-of-the-money puts at a lower strike.
4. "Spread"-create a spread by selling the out-of-the-money put against the put already held.
5. "Combine"-create a combination by buying a call at a lower strike while continuing a hold the put.
The first two strategies are the easiest alternatives. The remaining strategies allow one to attempt to achieve a balance
between retaining built-up profits and generating even more profits. The "Roll-down" strategy would involve selling the April-60-put
at around $18 1/2, take the initial investment, or/and buy a April 45 put at around $9(zqnpi now $2 15/16, or buy 2 of cheaper
ones). It is important to time this right. I am expecting a dead-cat-bounce once AMZN plunges below $50. Sell the original put low,
buy back high.
The "Spread" is a rather conservative strategy. Once you see the first bottom (probably below $50) you'd SELL an April 50
put against the April 60 you already have. This would create a bear spread, technically. Now let us study the risk and reward
for this particular strategy. The sale of April 50 put would generate around $9 purchase cost of the April 60 put. Thus your
"cost" for this spread is nothing-you have no risk, except commissions. If AMZN rise above $60 by expiration , all the puts puts
would would expire worthless. This would present the worst case-you would recover nothing from the spread. (But what do you think
is the chance that AMZN would bounce back above $60? �very slim) If the stock should be below $50 at expiration, you would
realize the maximum potential of the spread, which is 10 points. (note that this line can be $45 or even lower...depends oh how the
graph behaves, but even at $50, it is 100% profit) That is, no matter how far AMZN is below 50 at expiration, the April 60 put
will be worth 10 points more than the April 50 put, and the spread could thus be liquidated for 10 points. Your maximum profit
potential in this spread situation is 10 points. This tactic would be the best one if AMZN stabilizes near $50 until expiration.
Yes- E*Trade, Ameritrade, and another full service house I use all tell me I can't short it. Ameritrade actually told me that it's because the SEC put a restriction on shorting the stock. But that's OK, because it doesn't stop me from writing deep in the money calls and buying them back later after the stock drops in a fiery valuation death spiral. The premium on the option is so high that the option behaves similar to the underlying.
Take a look at writing the July 40 Calls. Each contract you write puts about $2400 in your account. If the stock actually drops all the way to about $43 you get to keep all of it. If it drops to $55 (a little less apocalpytic) you buy the contract back at something closer to $1900 and pocket the $500. If the stock goes to, say, $70, stop your loss and buy the contract back for a few hundred dollar loss.
Take a look at the open interest on this contract compared to the rest of the montage. LOTS of July 40 contracts out there.
Which is more likely:a $70 AMZN before July or a $40 AMZN?
You can short AMZN shares. Some brokerages will not allow you to short a stock if they don't have the stock to lend. (This seems like your situation.)
However, some brokerages will allow you to short a stock they don't have, however, you will be subject to buy back the stock at any time the brokerage house calls on you to do so. Therefore, you take the risk of buying back the stock at an unfavourable moment and/or price.
You may want to switch your broker.