AMZN-PSA Shorting the Stock Is Hazardous to Your Financial Health

by Dan May 13, 2011 11:20 am • Commentary

I just cant hold out any longer, I need to get short AMZN, but would have to have my head checked to do it outright…..The operating income guidance was so bad when they reported that the stock not only went up, it went up a lot….I was wrong, but I am going to make that money back.

I will be back with some more detail (and a longer dated trade idea) but with the stock at 204.60 I just bought some May 195 Pus for .65, trade breaks even in a week if stock is down ~5%.

-I am seeing bubbles burst all around, SLV and Chinese Internet names SINA, SOHU and NTES…..AMZN will be the next to break in my opinion…..Chart below shows the relative performance of AMZN to SINA, BIDU and NTES.  AMZN is clearly benefiting from speculative $ coming out of Chinese Internet stocks and back into a speculative Internet stock of our own.  I believe this gap will close.

[caption id="attachment_1737" align="aligncenter" width="429" caption="AMZN Performance VS SINA, BIDU and NTES Chart Provided by Bloomberg"][/caption]



1. AMZN‘s disappointing eps results and operating margin guidance should have the stock down, especially when  you consider the stock is within a few percent of its all time highs…..

-the jury will be out for a while whether or not all of this spending on full-fillment centers and other projects pays off, not sure why investors aren’t taking more of a wait and see attitude here…..

-I am long the May 170/160 Put Spread and going to let it breath a bit, stock went almost as low as 170 in the after hours at one point last night…..will look to see if we have similar action to NFLX yesterday where the stock opened down, then had a little rally and then fell apart closing on the lows….

-As far as the structure I picked levels where I thought it could go if my thesis was right and risked only what I was willing to lose if I was wrong, or in this case the market doesn’t come to the same conclusion about the results…..

PREVIOUS POST April 26. 2011:


AMZN Reports Q1 earnings tonight after the close, the options market is implying about a 7% move vs its 8 qtr average of about 7%.  Of the 8 moves there is one move of ~27%, 2 were about 7.5% and all others were below 5%.


-Stock is up 3% ytd and only about 3.5% from its all time high made earlier this year.  More importantly the stock is up 15% since making 4 month lows last month.

-Stock is up almost 80% from it’s 52 week lows made last summer…..

-Analyst community fairly mixed on the name with 21 Buys, 10 Holds and 1 Sell with and average 12 month price target of ~198.

-In the latest 13f filing for Q4 2010, of the top 20 holders, 8 reduced their positions, while only 5 added meaningfully while the rest stayed put.

-Short interest remains relatively low with approximately 2% of the float sold short.


-Late last month I rolled a relatively successful Apr Put Spread into a very un-successful May Put Spread to set up for earnings when the stock was a little above 170.

-Well I am either stubbornly persistent, or just downright stupid…….no need to respond to that.  But at least I am not dumb enough to be naked short the stock, I learned that the hard way on a few instances in the latter part of the 1990s.

-In Late February I was originally drawn to the short as I noticed the stock had made back most of the losses suffered following its disappointing Q4 report and lower operating margin guidance for Q1.

-Since late March the stock has made back all of the loses and now is up on year although still lagging the major indexes….

-While many of the headwinds I addressed facing the company near term (read here from Feb and March posts) have not abated, new ones have popped up;

1) Japan is about 11% of the company’s revenues,

2) NFLX‘s push into original content to put further pressure on AMZN’s Prime streaming service before it really starts,

3) one of the big initiatives / capital expenditures of the last few years for AMZN has been its EC2 cloud platform, this past weeks massive outage (read here) should cause some investors to question the company’s strategy, not to mention the potential damage of the very bad press to its generally very solid traditional e-commerce brand….

5) Most importantly, will the company be able to show or guide to stabilization of operating margins, and thus get some leverage from the spending on fulfillment centers and logistics as blamed for the shortfall in Q1 guidance……My guess is no, and if yes the stock will surely rally, but I wouldn’t exactly believe them…but that’s just my bearish cynicism.

TRADE: AMZN (stock ref 185.42) BUY the May 170/160 Put Spread for ~ 1.30

-Buy May 170 Put for ~2.20 and

-Sell May 160 Put at ~.90

Break-Even  on May Expiration:

Upside: stock above 170 (down ~8%)  lose the 1.30 premium you paid or less than 1% of the underlying.

Downside: btwn 168.70 (down ~9%) and 170 lose up to 1.30, btwn 168.70 and 160 make up to 8.70….

BEST CASE: stock 160 (down ~13%) or below and make 8.70

TRADE RATIONALE: This trade structure is clearly playing for a big downward move…..I chose out of the money spreads as I want to commit a small amount of premium for the potential of a big pay out if you get the outsized move lower…..

-Chart is clearly dangerous for the shorts as it is sitting a few % away from the all time highs and has been in an almost 5 month channel btwn 160 and 190……any good news could cause a massive breakout above that resistance level.

-200 day moving average at about 162 the low end of the channel and I am willing to risk less than 1% of the underlying stock price that the company is not able to turn things around this quickly given recent added challenges….Chart blow shows this band and the 200 day moving average (white line), which is probably where the stock would go over the next few weeks with disappoint results and guidance.

[caption id="attachment_1408" align="aligncenter" width="430" caption="AMZN 8 Motnh chart            By LiveVol"][/caption]