Here is a preview of what I will be discussing tonight on Options Action on CNBC at 5pm. My esteemed colleague and your resident Bear, Enis Taner, collaborated with me on the idea.
Amazon.com is a stock we love to hate. We’ve written extensively about AMZN before, mentioning that the stock trades off its 2016-2018 earnings estimates, since it has minimal earnings right now. But 5 years is an eternity for any public company, especially a technology company. Just ask RIMM shareholders from 2007 and 2008.
The best bullish argument for AMZN is that the stock doesn’t go down. So we can say whatever we’d like, but the stock continues to find new buyers. As a result, the stock to us is much more of a sentiment story than a fundamental story. Who cares about sales growth if it never translates into earnings (AMZN has never generated more than 2.53 in EPS (GAAP) in a calendar year)?
As such, we have our pulse on the technicals to figure out when the stock gets stretched. And looking at the 1 year chart, the stock looks like it might have made a double top:
The stock broke its uptrend in late October. The rally since earnings has taken the stock back to the $260 area from where it broke down in the fall. The risk/reward of using an options structure to fade the recent move higher seems especially favorable here (note: we would not advise outright shorting a stock near all-time highs like this).
MY VIEW: This past January, when AMZN reported their 2011 Q4 results, the company missed consensus estimates on a few important metrics (including sales, eps and operating margins), despite growing sales 35% year over year. The company had a whole host of excuses, blaming weak video game and console sales and the increased adoption of third party sellers. I would expect the company to face similar struggles in the current quarter, with additional new ones (like weaker than expected Kindle sales). But here is the thing, investors don’t seem to care that the company is earning less on more and more sales. My sense is that AMZN has benefited from investors’ recent move out of AAPL into potentially faster growing companies. AAPL’s bubble bursting is most definitely a positive for AMZN, but I can not for the life of me imagine how the AMZN price performance vs lack of profit bubble won’t also burst in the coming months.
I want to make a defined risk play that AMZN re-traces about 50% of the last years moves in the coming months.
TRADE: AMZN ($256.70) Bought the APR 240/200/160 Put Butterfly for 5.80*
-Bought 1 Apr 240 Put for 12.19
-Sold 2 Apr 200 Puts for a total of 7.66 (3.83 each)
-Bought 1 Apt 160 Put for 1.27
Break-Even on Apr Expiration:
-Profits btwn 234.20 and 165.80, make up to 34.20, max gain of 34.20 at 200, profit trails off btwn 234.20 and 160.
-Losses of up to 5.80 btwn 234.20 and 240 and btwn 165.80 and 160, with max loss of 5.80 above 240 and below 160.
* When I executed this, the bid /ask was $5.40 at $6.10 and I put in a 5.80 top and got filled. I NEVER PAY FULL BID ASK ON A MULTI LEG ORDER LIKE A BUTTERFLY.
TRADE RATIONALE: Outright put purchases and even straight verticals are expensive, as the Butterfly is a bit more difficult to manage, it gives me a wide range to be profitable at a very reasonable risk / reward. Below is a 2 year chart show this range, if I get the direction right over the next few months, I think it is safe to say that it will not be hard to make money on this trade.
AS FOR CONVICTION, I WOULD SAY THIS IS MEDIUM AS IT IS PURELY A SENTIMENT PLAY AS I SAID ABOVE. WITH SO MUCH TIME TO PLAY OUT, I AM DOING THIS AT HALF MY NORMAL TRADING POSITION SIZING AS I WANT TO TAKE A LOOK AT FEB OPTIONS WHEN THEY ARE LISTED NEXT WEEK AS THEY WILL CATCH Q4 EARNINGS.