Update: Amazon Kindling for a Selloff

by Dan July 25, 2011 1:52 pm • Commentary

Update July 25th, 2011:

Company reports their Q2 tomo after the close, and frankly while I was not playing for a miss, the sentiment is just too strong and I don’t want to have short AMZN exposure into NFLX‘s earnings tonight…..When I put this trade on I was less convinced about the strength of Q2 earnings and most have come in better than expected.

ACTION: I Just sold the spread at 2.06 for a .54 loss (I paid 2.60).

-Technically the chart is basing in a fairly tight range at all time highs and this scares me a little bit.   The 30 day chart shows the run up from the mid 180s to current levels and what appears to be a flag forming…..

[caption id="attachment_3447" align="aligncenter" width="300" caption="30 day AMZN chart provided by Bloomberg LP"][/caption]

-With short interest at a recent high in the name and sentiment for web/e-commerce, I am going to take a more conservative approach and cut my losses.



Original Post July 14, 2011:

AMZN is a stock that I love to hate, primarily because I tend to be contrarian, and that it is just one of those names where the stock rarely trades with the fundamentals.  I have been short this stock on a couple of occasions this year through Put Spreads and frankly while I have had some decent short term hits in the name, I have been wrong on a longer term basis……I like to make short term tactical bets around events when I feel that there is a massive disconnect btwn sentiment and reality…….and generally like to do this when I feel the market is at an inflection point……as we are now.  I think AMZN meets a lot of the criteria at the moment and I want to use options to defiine my risk and place a near term bearish bet. [private]

With stock at 211.35, I just bought the August 200/190 Put Spread for 2.60.

Breakevens on August Expiration:

Worst Case: Stock above 200 on expiration lose 2.60, anywhere between 197.40 and 200 lose up to 2.60…..

Best Case: Below 197.40 make money with max profit of 7.40 at or below 190.

Few Quick Points: love the company, think the stock is way ahead of itself heading into Q2 earnings report July 26th.

Technically the stock looks like could easily retrace a portion of the 16% rally off of the June lows.  The 200 day moving average is about $181 and I would be playing for a near term move back to $190 the level where it broke out in late June.

[caption id="attachment_3251" align="aligncenter" width="300" caption="1 Yr AMZN chart Provided by Bloomberg lp"][/caption]