Don’t Wait for Dips, Trade Amazon.com, Inc. (AMZN) Stock for Free
Amazon.com, Inc. (NASDAQ:AMZN) is the stock that too many fundamental investors love to hate. Why they keep shorting based on profitability it is a puzzle to me. AMZN is the ultimate growth company that never stopped being a startup. If they cover the name on the door and look at it from that perspective they’d have no problem with its valuation.
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But even if I examine it as a thin-margin mature company, I still like what Amazon is doing. Under the brilliant leadership of Jeff Bezos, they are perpetually expanding into, and dominating, new industries. They even established a few new ones along the way.
Two recent examples of accomplishments are their foray into the interactive home assistants with the Echo line of products and their domination of cloud services with Amazon Web Services.
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Their recent acquisition of Whole Foods Market, Inc. (NASDAQ:WFM) now brings the AMZN threat to the street. Businesses are trembling — as they should. Just consider the damage they inflicted on the brick-and-mortar department store industry. Macy’s Inc (NYSE:M) stock is almost half of what it was five years ago.
Most experts who criticize Amazon’s model have to respect the impact it has on its competitors. Evidence to that is the recent mini crash in stocks like Wal-Mart Stores Inc (NYSE:WMT) and Kroger Co (NYSE:KR) on the WFM acquisition headline.
They know what they are doing so I give AMZN management team the benefit of the doubt until they stop delivering growth. Only then would it be the time to demand better margins.
As much as I like the story that is AMZN, I am not reckless so I won’t buy the stock outright and hope for a rally. I need some wiggle room, and for that I use options.
Even though I favor the upside move in AMZN through 2017, I prefer to bet on proven support. So I will leverage levels that I deem safe so I can create income from nothing. Today’s trade will have no out-of-pocket expense from me.
AMZN Stock Trade Idea
The Trade: Sell AMZN Nov $780 put for $2.50 per contract. Here I have a 90% theoretical chance of success. If the price stays above my strike then I retain maximum gains. Otherwise, I have to own the shares and suffer losses below $777.50.
Not all traders are willing to sell naked puts on a stock that costs almost a thousand bucks. Those people can sell spreads instead. To do that I buy an equal number of puts but lower than the ones I sell. This would limit the maximum loss scenario. As a result, the spread would require considerably less margin, making it more palpable to traders.
The Safer Trade: Sell AMZN Nov $780/$775 credit put spread, where I can yield 10% on risk with about the same odds of winning.
In either case, I don’t need a rally to win. Amazon stock could fall 20% from here and I could still profit. With the ultimate momentum stock, and one that costs almost $1,000 per share, this is a buffer that I absolutely need to take bullish trades with confidence, especially near all-time highs.
Investing comes with risk, so I never bet more than I can afford to lose.
Learn how to generate income from options here. Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on twitter and stocktwits.
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