Amazon is showing huge accumulation and recently joined the SwingTrader Portfolio. So, today's column highlights a long-term bull put spread in the options of AMZN stock.
With AMZN stock rallying at the end of last week, the stock earned a nice jump in its Relative Strength Rating to 91. And from a technical perspective, AMZN bounced off the 21- and 50-day moving averages and looks set to test the 52-week high at 191.70.
I'm willing to bet that AMZN stock will remain strong for the rest of the year.
AMZN Stock: The Long-Term Bull Put Spread
When it comes to options, we normally look at short-term trades — anywhere from one week to one month. Longer-term option trades tend to move a little slower than shorter-term trades. That allows more time to adjust or close, but also means a lower annualized return.
As a reminder, a bull put spread is a defined risk strategy. So you always know the worst-case scenario in advance.
This type of trade will profit if AMZN stock trades sideways or higher, and even sometimes if it trades slightly lower.
With AMZN stock trading around 190 recently, if we use the Dec. 20 expiration, we can sell a put option with a 170 strike price. Then we can buy a 165 put with the same expiration to set up the bull put spread. That spread was recently trading around $1.25 per set of contracts. Selling this spread would generate roughly $125 in premium. That puts the maximum risk at $375 in this trade.
If the spread expires worthless, it would generate a 33.33% return in six months, provided AMZN stock holds above 170 at expiration. That seems like a pretty reasonable bet to me.
The 170 strike put has a delta of 25, which means it has a roughly 75% chance of expiring worthless.
Risk Vs. Reward
The maximum loss would occur if AMZN stock closes below 165 on Dec. 20. In this case, the premium seller would lose a maximum $375 on the trade.
The break-even point for the trade is 168.75. Calculate by taking 170 less the $1.25 option premium per contract.
I would set an adjustment point or a stop loss if AMZN drops below 177.50. Otherwise, another good rule of thumb is to limit the loss to the amount of premium received which in this case would be $125.
Sticking to this stop loss level will help avoid large losses if the trade goes south.
According to IBD Stock Checkup, AMZN stock is ranked No. 2 in its group and has a Composite Rating of 93, an EPS Rating of 82 and a Relative Strength Rating of 91.
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.
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
