Amazon.com (AMZN) has gained about $75 billion in market cap in 2015, a year where the company is expected to report their lowest year over year sales percentage gain ever. But as many of your know, we’re talking big numbers here. The company has grown sales by more than $10 billion a year since 2009. This year Wall Street analysts expect sales to top the $100 billion mark, up 16% year over year. The size is truly staggering. But with everything having to do with Amazon there’s something even more staggering. On that expected $103 billion in sales, analysts only expect the company to register $1.4 billion in net income.
Not worried, investors have chosen to focus on sales growth and the potential for future profits instead of mundane investing inputs like valuation. Attempting to short AMZN since its lows during the financial crisis has been a costly endeavor, with the stock up more than 1100% since late 2008:
Since the stock’s 14% gap higher following Q1 results in late April the stock has traded in a fairly tight range basically between $440 and $420:
On a 2 year basis, the obvious round number on the downside is $400, which could serve as a magnet on the slightest disappointment when the company reports Q2 results in late July:
The stock trades fairly well given the 50% gains off of the 2015 lows made in January, and as always valuation doesn’t matter until it does, like in 2014. Stocks like AMZN that have no valuation support need to continue to execute on the plan that investors have already bought into. It should not be lost on investors that in 2014 AMZN had two stock sell offs from peaks of 20% or more, largely on angst over some disappointing product moves (remember the Kindle phone?).
Short dated options prices are cheap, with 30 day at the money implied vol at about 22%, nearing the 52 week lows
Despite low vol in the near term, options prices in August that will catch earnings are not exactly cheap, and they will get a lot more expensive as we get closer to earnings and with the slightest uptick of broad market volatility. I see few reasons that suggest imminent protection for long holders but those who are looking for dollar cheap protection in August may want to consider wide butterflies.
Here is a trade I would consider against 100 shares of AMZN at $430:
Hypothetical Overlay: Buy August 420 / 370/ 320 Put Butterfly for $10
-Buy 1 Aug 420 put for 18.00
-Sell 2 Aug 370 puts at 4.50 each or 9.00 total
-Buy 1 Aug 320 put for 1.00
Break-Even on August Expiration:
Profits (as a hedge): of up to $40 between $410 and $320, with max gain of $40 at $370
Losses: up to $10 between $410 and $400 & between $320 and $330, max loss of up $10 below $320 and above $420
Rationale: this is pretty solid protection for almost 10% of a downward move if the stock was to go to $370 support while only risking $10. A disaster situation could occur of the stock went down significantly below the 370 strike but there is little chance of that and this hedge risk/reward profile is very realistic given only spending $10 on such a wild stock.