Amazon (AMZN) appears to be on a steady upward trajectory, comfortably positioned above its ascending 20, 50, and 200-day moving averages. This positive momentum sets the stage for potential profit opportunities through a range of option strategies.
A Path to Profit
By implementing a fusion of option tactics, there is a chance to either secure the purchase of AMZN shares at a discounted rate or yield a fruitful profit amidst sideways stock movement.
The trade scenario involves selling the AMZN May 17 put with a $160 strike price, trading around $3.90, and initiating a bear call spread:
Selling the AMZN May 17 call at a $200 strike price (trading around $2.60) and buying the AMZN May 17 call with a $205 strike price (valued at approximately $1.95) lead to an accumulation of $455 in premium through both trades.
Upon trade commencement, the position boasts a delta of 20, suggesting an equivalency to holding 20 shares of AMZN. However, this value may fluctuate as the trade unfolds.
Visualizing Potential Outcomes
After approximately a month, the trade’s viability can be assessed. The particulars of the venture reveal a promising outlook, especially if the stock remains above the $165 mark.
Diverse Scenarios for the AMZN Stock Option Trade
Delving into potential scenarios at the May 17 expiration date:
– A scenario where AMZN maintains a sideways trajectory within the $160 – $200 range leads to the expiration of both the sold put and bear call spread, resulting in a total profit equating to the $455 premium.
– In the case of AMZN dipping below $160 at expiration, assignment on the sold put is triggered, mandating the purchase of 100 shares at $160. Nevertheless, the net cost base settles at $156.45, courtesy of the $455 option premium, marking a substantial 9.8% discount from Tuesday’s closing price.
– Should AMZN rally above $205, the bear call spread could incur a complete loss of $500, offset to a large extent by the $455 premium, leading to a minor loss of $45.
Company Analysis
Amazon’s technical stance reflects a 100% Buy rating by Barchart Technical Opinion, emphasizing a bolstering short-term trajectory and firm long-term indications favoring the existing trend.
While the market progresses closer to overbought territory, a vigilant eye remains essential for any signs of a prospective trend reversal.
Analysts covering AMZN stock show a strong orientation, with a majority providing Strong Buy ratings, underpinning positive market sentiment toward the company.
Amazon’s market volatility stands at 25.26%, showcasing a marked difference from its twelve-month high and low points. The current volume places AMZN stock’s IV Percentile at 13% and an IV Rank at 8.32%.
The expansive realm of Amazon’s operations spans across global e-commerce, bolstered by the Prime program and an extensive distribution network. Additionally, acquisitions like Whole Foods Market have propelled Amazon into the physical grocery sector, further solidifying its market presence.
Amazon’s stronghold in cloud-computing, particularly in Infrastructure as a Service via Amazon Web Services, along with the widespread adoption of Alexa-infused Echo devices, underscores its innovation and diversification within various market segments.
Insightful Conclusion
Despite the capital-intensive nature of such strategies, leveraging options to generate income while securing desired stock holdings can prove to be a savvy financial move.
In the event of assignment, the option to engage in covered calls against the stock position presents an added avenue for income generation.
While replicable on other stocks, exercising caution and starting small to grasp the nuances of the process remains prudent.
Risk Management is Key
In any option venture, a structured risk management plan serves as a vital safeguard against adverse market movements. Consider incorporating a deep out-of-the-money long put, such as the May 17 put with a $130 strike price, to mitigate risk by capping potential losses.
Remember, while options offer lucrative prospects, inherent risks prevail, necessitating thorough research and consultation with financial advisors before venturing into investment decisions.
