Near the lows of the stock market in late March, the price action and technical set up in Amazon (AMZN) struck me as unique given the negative sentiment in the market coupled with the clear advantages of AMZN’s business model given the new rules of the pandemic economy:
$AMZN is one of the most constructive looking charts in the stock market, that uptrend is your stop. pic.twitter.com/9bgNh7o3Ls
— Dan Nathan (@RiskReversal) March 25, 2020
Not only did AMZN hold that up trendline, but the stock exploded through upside resistance, is now up 30% on the year, and up nearly 50% from the March lows:
Earlier this week prolific investor and entrepreneur Mark Cuban was on Fast Money, who has been a long time shareholder and steadfast bull on AMZN, I asked him whether he thought the recent sentiment causing the stock’s strength will abate once the economy gets back to a more normal state? His answer was NO, basically that the consumer trends that were already in place pre-pandemic have only been accelerated in the current environment, and will only play to AMZN’s strengths in a post-pandemic world, watch below:
“Shark Tank” Investor and Dallas Mavericks Owner Mark Cuban comments on when Amazon and the continued market volatility. pic.twitter.com/w3Yiy0O0Fe
— CNBC’s Fast Money (@CNBCFastMoney) April 20, 2020
It is nearly impossible to argue with Mark’s view on the company, and when you layer in their deep investments in warehouses, logistics, third party selling facilitation, Prime, on-demand video and music and then of course AWS and you might have thought that CEO Jeff Bezos took a hard listen to is Seatle neighbor, Microsoft Bill Gate’s prescient 2015 warning of our ill-preparedness for a pandemic, and he continued to build his company for a post-retail, work/learn/play from homeworld. Mark thinks AMZN is “going up, up, up”, but I think it is safe to say that he means that over time. A pul-back to the breakout level between 2000 and 2200 would be a great spot to for those who agree with Mark and that prior technical resistance should serve as very healthy technical support.
Well for those who missed the AMZN rocketship, it might make sense to look at Alibaba (BABA) the closet business model in the word to AMZN’s and it happens to be in China, the country where the adverse effects of the Covid-19 epidemic were first felt, but has since started to re-open.
Shares of BABA have not had nearly as sharp a bounce from last month’s lows, up about 21%, and still down about 4% on the year and down about 10% from its all-time highs made in January. The stock’s 5-year chart looks a lot like AMZN’s before it broke out:
The company is expected to report its fiscal Q4 earnings in mid-May and any color on the Chinese consumer that is better than expected could cause the stock to re-test or possibly make a new all-time high.
So what’s the trade? While short-dated options premiums have come in hard from last month’s highs, they remain elevated, but near levels to where they get prior to earnings events. This setup lends itself well, for those looking to express long premium directional views into the print to either spreads or calendars.
If I were looking to target a May 15th earnings release (not yet confirmed) and thought the stock could re-test the $230 high, I might consider a call spread:
Bullish Trade Idea: BABA ($203) Buy May 210 – 230 call spread for $4
-Buy to open 1 May 210 call for 4.60
-Sell to open 1 May 230 call at 60 cents
Break-even on May expiration:
Profits of up to 16 between 214 and 230 with max gain of 16 above 230
Losses of up to 4 between 210 and 214 with max loss of 4 at 210 or lower.
Rationale: this trade idea risks 2% of the stock price, has a break-even up 5.4% from the current levels and has a max gain of about 8% if the stock is up 13% on May expiration.
Or If you want to take advantage of near term elevated premium levels, and the uncertainty of when the earnings will be you might consider a call calendar… selling a short-dated out of the money call and buying a longer-dated call of the same strike… for instance:
Bullish Trade Idea: BABA ($203) Buy May 8th weekly – May 24th weekly 210 call calendar for $3.50
-Sell to open 1 May 8th 210 call at $2.75
-Buy to open 1 May 22nd 210 call for $6.25
Break-even on May 8th expiration: if the stock is 210 or less than the short call will expire worthless and you are left long the May 22nd 210 call that will catch earnings. The ideal scenario is that BABA is just below 210, and the long May 22nd call will have picked up some deltas offsetting decay, and you are left owning the call for a little more than half of what it would have cost today. The max risk of this trade is the premium spent, $3.50, or 1.7% of the stock price and would only be lost on a massive move below current levels or above the 210 strike. For those who want to isolate earnings and lean bullish, this is a good way to leg into defined risk long exposure, also offering the ability to turn the May 24th 210 call into a call spread by selling a higher strike call of the same expiration, further reducing the premium at risk