by Staff Reports Money Morning, Money Morning
— this post authored by Mark Sebastian, Volatility Specialist, Money Morning
Editor’s note: This was written before Friday’s market opened. AMZN declined by 1.37% during the day June 25. Option premiums quoted in the article may not be available at the lower stock price.
The timing is perfect on this trade…
At midnight on June 24, Amazon.com Inc. (NASDAQ: AMZN) closed the books on another 48-hour Prime Day “shopping holiday.”
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Amazon’s $9.9 billion haul in 2020 wasn’t bad, but analysts expect 2021 receipts to top $11.7 billion, as more than 150 million Prime customers hit “Add to Cart” on hundreds of thousands of specially marked items.
$11 billion… 150 million customers – numbers like that have to move the needle, right?
Well, not quite. Those numbers will move the needle, but it’ll move in a direction a lot of folks aren’t expecting, and I’ll show you why.
Right now, the single smartest, most profitable thing you can do is “fade” Amazon’s rally, as we used to say on Wall Street.
To do that, there’s an “asymmetrical” low-risk/high-reward trade to make.
It’s far cheaper and a lot easier than you might think, and I’ll walk you through it.
The only catch, if you can call it that, is that you have to move quickly…
Here’s Why You Should Bet Against Rallies Like This
There’s an old Wall Street saying – “buy the rumor, sell the news.” Unlike a lot of things on the Street, this actually makes a lot of sense, and it can easily work in your favor. It’s a cliché for a good reason, and it’s nearly universal.
In anticipation of some “event,” be it an earnings report, a product launch, executive shakeup, a regulatory approval – whatever – traders bid the price of a stock up and up in anticipation of cashing in. Then when the event actually happens, those traders take that cash and run, sending the stock lower. They buy the rumor, they sell the news. Rinse and repeat.
Amazon’s no different. Last year, Prime Day began on Oct. 13 – a day that capped an impressive 13%, one-week rise for what was at the time a $1.5 trillion company.
After the big Prime Day 2020 event, with $9.9 billion fresh on the books… AMZN shares sank like a stone for weeks until the end of October. Traders did what traders do and sold the news.
This most recent earnings season is another example; Amazon, Apple Inc. (NASDAQ: AAPL), Alphabet Inc. (NASDAQ: GOOG) all hit Wall Street with great numbers – strong beats almost all the way across the board – and all of them sold off.
AMZN shares are up nearly 10% year to date and a little less than 8% over the past month. So Amazon’s certainly coming into Prime Day 2021 in strong shape. The thing is, no matter how good the past two days’ numbers are, history and momentum tell us it won’t be enough to keep the rally going.
That’s why it’s absolutely critical you make this trade when the market opens on June 24.
How to Trade and Fade AMZN Today
There are a few different ways you can make money on a stock that’s sinking…
You can sell it short, “borrow” stock on margin, and “return” it for a lower price, pocketing the difference. This can be incredibly risky – particularly if you’ve made Reddit angry – because your losses are theoretically limitless. A stock can only go as low as $0, but there’s no “ceiling.” Leave this strategy to deep-pocketed hedge funds, or at least the ones on Reddit’s good side.
For us sensible, mere-mortal types, profiting on a stock’s decline means trading put options, which increase in value as a stock’s price declines. The most straightforward way to do this is to buy puts. That can be a great, easy strategy, but when it comes to AMZN, there’s a “significant” wrinkle. You’re risking an awful lot there – just a single share of Amazon will set you back more than $3,500 as of midday Wednesday, and options cover groups of 100 shares.
The name of our game is “asymmetrical,” remember? We want low risk and high reward.
That means an Amazon bear put spread is absolutely the way to go here. It’s a lot easier than you’ve been told. Not only that, but it’s a move I recently recommended for my free Profit Takeover subscribers.
To put together a bear put spread, you’ll buy one AMZN put and sell another AMZN put, both expiring on the exact same date. Make sure the put you buy has a higher strike than the put you sell. The premium you collect on the put you sell offsets your cost, slashing your entry price and risk.
Here’s a spread that looks good to me:
- Buy an AMZN Sept. 17 $3,350 put for $114.
- Sell AMZN Sept. 17 $3,250 put for $84.
In one fell swoop, you’ve slashed your cost and risk to less than you’d pay for one AMZN share, and you’re set up to make a tidy profit as Amazon declines.
