With all the hoopla over the Amazon Drone today, we wanted to revisit the stock for a potential trade heading into the end of the year.
AMZN has basically been on our banned list for the past year. We have expressed on numerous occasions our love for Amazon as a company, but our concurrent dislike for the stock. Dan summed up our thoughts quite well in his MorningWord today:
I guess I will leave you with this – AMZN CEO Jeff Bezos is clearly a genius, he has transformed modern consumerism, and will likely continue to do so. At the same time, he has brainwashed shareholders into trusting him that the profits will eventually come. I guess what I don’t understand is that how will AMZN actually monetize Drone Delivery – will they actually be able to charge for it in a manner that will every make back their investment and cost to maintain such a massive logistical undertaking?? The counter would be that years ago when the company introduced Amazon Prime, free 2 day shipping all year for only $80, analysts were convinced this would be a big loser for them, but Bezos was convinced it would hook consumers to their online store and keep them coming back. Well, that worked very well, but again the company sells lots of stuff at cost just to keep your business.
Maybe, just maybe, AMZN management is a bit too profligate with its spending/investment projects simply because investors are all too willing to finance it.
We have only traded AMZN once in 2013, in a brief lapse of judgment. We took that trade off for a loss at our stop in June, and have watched the stock’s 50% rise from afar ever since. This has been a situation where we have not traded our opinion for one main reason – the stock did not make sense to us at 150, 200, or 250, so there is little reason for us to argue against it rising to 300, 350, 400, or beyond. In short, we don’t know why it’s going up, and even if we don’t like the stock ourselves, we’d rather not place our bets in a situation that simply doesn’t make sense to us. The market is full of stocks that we’d much rather trade.
So we’re not doing a new trade in AMZN today. But today’s reversal is interesting to us nonetheless, particularly since the stock has stalled despite the obvious news catalyst from last night. For you more courageous souls, we wanted to lay out a structure that looks intriguing for a potential correction in AMZN:
Name That Trade: AMZN ($394) Buy the Feb 400/350/300 Put Fly for $11.50
Trade Rationale: This trade is profitable if AMZN is between 311.50 and 388.50 on February expiry. The stock traded as low as $300 less than 2 months ago, so the stock has scaled the past $100 very quickly. However, given its upward momentum, we don’t think any selloff will lead to a move below $300 over the next few months, so this structure is a great risk/reward way to play for a correction.
The one caveat is that the structure will take time to make money. Its delta at initiation is only -0.16, meaning it will make about 16 cents for each $1 move lower in the stock. So at $350, the structure will be worth around $16.00, not a huge gain if AMZN moves there quickly.