AMZN-PSA (Public Service Announcement): Shorting AMZN Is Hazardous To Your Financial Health…..Consider Buying Apr Put Spreads To Express Short Term Bearish View

by Dan February 24, 2011 1:56 pm • Commentary

[private][private]Let me reiterate…..not a great idea to short AMZN, Wall Street is littered with guys (and gals) who thought they bagged this one…..but very few ever have and most found it to be a career ending endeavor……

MY VIEW: When AMZN reported in late Jan that 4Q10 sales fell short of expectations and that operating income guidance for 1Q11 would be well below street consensus causing shares to sell off ~7.5% the next day  i would not have thought the stock would have recovered in a matter of weeks and almost made a 52 week high…..but that’s exactly what it did….Since that ridiculous rally the stock has retraced half of that move in sympathy with the markets sell off, but there is still more to go if you are paying attention to some of the results and commentary from their lamo bricks and mortar competitors.
-in a week that saw disappointing fundamental news from retailers such as WMT, RSH and SHLD, all of which fell short of investors expectations of either lower earnings and/or sales i am hard pressed to think that AMZN wont and hasn’t felt some of the same pressures in a period where they have already acknowledged that they will spend aggressively to build fulfillment and data centers.

TRADE:  BUY APRIL 170 / 150 Put Spreads for ~4.25

-Buy 1 Apr 170 put for 5.75 and

-Sell 1 Apr 150 put at 1.50

Break-Evens on April Expiration:

Upside: 170 or above you lose the 4.25 premium that you paid (~2% of the underlying)…btw 170 and 165.75 can lose up to 4.25 (long strike less premium paid).

Downside: btw 165.75 (-6%) and 150 (-15%) can make up to 15.75…

Best Case: Below 150 u make 15.75 (or about a 9% return)

RATIONALE: In names like this, have a view and define your risk, specifically define what you are willing to lose if the stock goes up, which in this case it usually it does….also be mind-full of the risk reward ratio, in a near the money vertical spread like this i generally don’t want to pay more than 25% of the width of the spread.[/private][/private]