Amazon.com Inc (AMZN) has been one of the most remarkable growth stories of the last two-decades and there is an exceptional way to use options to profit from the run.
Amazon.com Inc Stock Tendencies
Buying an at-the-money call (also known as a 50 delta call) is a bullish stance on a stock. Let’s gaining our edge by looking at how buying a weekly 50 delta call every week for the last 2-years has done.
This strategy has returned 719% in the last two-years while the stock has risen 120%. But let’s not get caught up in big numbers — that strategy has done nothing to address the risk. In fact, if we look carefully at those results, what we will see is that the calls ended up making money only 43.8% of the time.
That win-rate is actually low — for the record, a 50-delta call (at-the-money) should end in the money 50% of the time (delta is a proxy for a probability). So that means what we really see is that these calls lose often, but when the turn into a win, they really take off.
A proper approach to optimizing this reality, is to let the winners run, but cut the losing calls off early. We can do this by putting in a stop loss. While a long call can lose 100% of its value, what we can do is put in a rule — in an y week, if the call loses 70% of its value, let’s cut it off, and trade the next week. We are effectively removing 30% of the downside risk by doing this:
And here are the breathtaking results:
We took that 719% winner and turned it into a 777% winner — but more importantly we substantially reduced the risk. Now, if our analysis is correct, this stop loss implementation of owning calls should have worked better than the normal strategy of just buying and holding for all time periods.
It turns out that this is exactly what we find. Here are the results, side-by-side, for one-year:
Over the last year the results are even more important. We can see a standard long call strategy returned 227% while cutting the risk off with a stop loss turned into a 321% return. Also note that the percentage of winning trades was 46.2% for both. We have done exactly what we set out to do, based entirely on the behavior of Amazon.com Inc’s stock.
Cut off the losers fast, let the winners run.
This intellectually smarter approach to Amazon options worked for the last six-months as well — of course it did.
What Just Happened
The key to option trading is actually pretty simple — understanding the dynamics of the stock you’re looking at allows you to adjust the option strategy to reflect those dynamics. There are two pieces of good news here:
* First, the returns are higher and the risk is lower
* Second, there is now, finally, a tool available for investors to do this themselves — and it’s remarkably easy to use.
This could have been any company — like Apple, or Facebook, or any ETF and any option strategy. What we’re really seeing is the radical difference in applying an option strategy with analysis ahead of time, whether that’s a stop loss or avoiding earnings, or both. This is how people profit from the option market — it’s preparation, not luck.
To see how to do this for any stock, for any strategy, with just the click of a few buttons, we welcome you to watch this 4-minute demonstration video:
Thanks for reading, friends.
The author has no position in Amazon.com Inc (AMZN) at the time of this writing.
Trading futures and options involves the risk of loss. Please consider carefully whether futures or options are appropriate to your financial situation. Only risk capital should be used when trading futures or options. Investors could lose more than their initial investment.
Past results are not necessarily indicative of future results. The risk of loss in trading can be substantial, carefully consider the inherent risks of such an investment in light of your financial condition.
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