We haven’t traded AMZN once this entire year, for one simple reason, it’s a stupid stock. What do I mean by stupid? Well, profits, margins valuation haven’t mattered for much of the stock’s existence so choosing to base a trade on any of those inputs nine times out of ten will make you look stupid.
Since the stock bottomed in November 2008, to its all time high made in January of this year, it rose more than 1000%. While annual sales have grown from $19 billion in 2008 to this year’s expected $90 billion, operating profits are expected to be just a tad higher than the $842 million back in 2008.
So you get it, as long as sales keep growing to the sky, coupled with new product and service categories, investors have had little worries about mundane things like valuation in their investment thesis. To be clear, AMZN is a great company with a visionary founder firmly in charge. But even as a happy customer and a fan of Bezos, I am not inclined to be long the stock as management has demonstrated time and time again that they are solely focused on growth and innovation as opposed to profits, which is a strategy that helps a stock go higher until it doesn’t. So I will avoid the valuation argument altogether and just focus on the set up after the stock’s recent bounce.
Investors have gotten excited about the company’s rumored smartphone (possibly with 3d) launch on June 18th, and the stock has now risen back to what is fairly significant near term technical resistance. The one year chart:[caption id="attachment_41590" align="aligncenter" width="600"] AMZN 1yr chart from Bloomberg[/caption]
If you wanted to make a short term bearish trade (not on valuation) but on technicals, this could be the spot to do it. With the main risk being that the stock could continue to rally into next week’s phone introduction, in which case you’d be early. I personally think the stock will be a massive sell on the news (read more about 3d phones here), but timing for trade entry will be important.
As for ways to play, options prices in June are quite reasonable as 30 day at the money implied vol will likely start to ramp into next week’s event while options that fall in August expiration could be an even better buy as they also will catch Q2 earnings in the last week of July. Here’s the chart of IV:[caption id="attachment_41591" align="aligncenter" width="600"] AMZN 1yr chart of 30 day at the money IV from Bloomberg[/caption]
The trade we’d most likely look to do is a simple put in June, close to the money that is timed somewhere near the convergence of the 200 day moving average (currently $343) and as close in time to the phone event as possible.