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Amazon (AMZN) has shown good relative strength during this correction and is above all key moving averages. It could be getting ready to break out to the upside.
The Barchart Technical Opinion rating is a 100% Buy with a Strongest short term outlook on maintaining the current direction.
Long term indicators fully support a continuation of the trend.
Rather than just buying the stock, savvy traders can use the options market to find smart ways to trade Amazon stock without risking too much capital.
Today, we’re going to look at a couple of bull call spread trades on Amazon stock.
Here are the parameters for finding some bull call spread trade ideas on AMZN.
- Symbol equals Amazon
- Break Even Probability above 40%
- Moneyness -10% to 0%
- Days to expiration 30 to 150
Here are the results of that particular screener:
Let’s analyze some of these ideas.
Bull Call Spread 1: January $140 – $142.50 Bull Call Spread
As a reminder, A bull call spread is a bullish defined risk option strategy. To execute a bull call spread an investor would buy a call option and then sell a further out-of-the-money call.
Let’s use the first line item as an example. This bull call spread trade involves buying the January expiry $140 strike call and selling the $142.50 strike call.
Buying this spread costs around $1.25 or $125 per contract. That is also the maximum possible loss on the trade. The maximum potential gain can be calculated by taking the spread width, less the premium paid and multiplying by 100. That give us:
2.50 – 1.25 x 100 = $125.
If we take the maximum gain divided by the maximum loss, we see the trade has a return potential of 100%.
The probability of the trade being successful is 42.1%, although this is just an estimate and does not indicate the probability of achieving the maximum profit.
The spread will achieve the maximum profit if AMZN closes above $142.50 on January 19. The maximum loss will occur if AMZN closes below $140 on January 19, which would see the trader lose the $125 premium on the trade.
The breakeven point for the Bull Call Spread is $141.25 which is calculated as $140 plus the $1.25 option premium per contract.
Bull Call Spread 2: September $136 – $140 Bull call Spread
The next example is on the fourth line and involves buying the $136 September 29 call and selling the $140 call.
Buying this spread costs around $1.95 or $195 per contract. That is also the maximum possible loss on the trade. The maximum potential gain can be calculated by taking the spread width, less the premium paid and multiplying by 100. That give us:
4 – 1.95 x 100 = $205.
If we take the maximum gain divided by the maximum loss, we see the trade has a return potential of 105.13%.
The probability of the trade being successful is 42.1%, although this is just an estimate and does not indicate the probability of achieving the maximum profit.
Mitigating Risk
With any option trade, it’s important to have a plan in place on how you will manage the trade if it moves against you.
For a bull call spread, setting a stop loss of 50% of the premium paid is a good idea. In the first AMZN example above, that would be a loss of around $62.50. For the second example, the stop loss would be around $97.50.
Traders may also consider a stop loss if AMZN breaks below the 50-day moving average, currently around 132.
Please remember that options are risky, and investors can lose 100% of their investment. This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
On the date of publication, Gavin McMaster did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
