Amazon.com stock is set to report earnings on Thursday after the closing bell and the options market is pricing in a 6.6% move in either direction.
Amazon is a global leader in e-commerce, cloud computing and digital streaming services.
Analysts anticipate a 48% increase in earnings per share to $1.49 and a 10% rise in sales to $187.3 billion.
Key areas of focus include the growth rate of Amazon Web Services (AWS), projected at 19.3%, and the potential impact of Project Kuiper satellite costs on retail margins.
Additionally, recent tariff concerns, particularly those imposed by President Donald Trump on Canada, Mexico and China, may affect Amazon's operations.
Furthermore, Amazon is actively investing in data centers and AI cloud infrastructure, with an $11 billion investment planned in Georgia, following a previous $18.5 billion investment in the state.
These initiatives are expected to bolster Amazon's position in the AI and cloud computing sectors.
Amazon Stock Cash Secured Put
Today, we're looking at selling a cash secured put to take advantage of the high implied volatility around the earnings announcement on Thursday.
A cash-secured put involves selling an at-the-money or out-of-the-money put option and simultaneously setting aside enough cash to buy the stock.
The goal is to either have the put expire worthless and keep the premium, or to take assignment and acquire the stock below the current price.
They are very similar to a covered call and are quite easy to understand once you know the basics.
Anyone selling puts must understand they may be assigned 100 shares at the strike price.
For Amazon stock, a trader selling the Feb. 7 put with a strike price of 222.50 will generate around $230 in premium per contract.
The put has a delta of 20, which means there is an estimated 80% chance that it will expire worthless.
Amazon typically trades with implied volatility around 30%-35%. But the volatility on this short-term put option is extremely high at more than 90%.
Traders May Be Obligated To Buy Amazon Shares
The put seller would have the obligation to purchase 100 shares of Amanzon at 222.50 if called upon to do so by the put buyer.
The breakeven price for the trade can be calculated by taking the strike price less the premium received. In this case, that gives a breakeven price of 220.20. That's 9% below Tuesday's closing price.
If the stock stays above 222.50 at expiry, the put option expires worthless. That leaves the trader with a 1% return on capital at risk in just a few days. That works out to about 127% on an annualized basis.
The main risk with the trade is similar to outright stock ownership. If the stock falls significantly, the trade will suffer a loss. However the premium received will partly offset the loss. Keep in mind, the company reports earnings Thursday after the close.
Cash secured puts are a fantastic way to generate a return on stocks the trader is happy to own.
Traders Can Sell Calls If Assigned
With this example, the trader either generates a 1% return in just a few days, or they get to purchase Amazon at a reasonable discount on the current price.
If Amazon stock trades below 222.50 and the put gets assigned, investors can then sell covered calls against the position to generate further income.
According to the IBD Stock Checkup, Amazon is ranked No. 1 in its industry group. It has a Composite Rating of 99, an EPS Rating of 79 and a Relative Strength Rating of 89.
It's important to 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.
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on X/Twitter at @OptiontradinIQ
