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Amazon (AMZN) stock may not have peaked if you believe Andy Jassy, Amazon's CEO in a recent interview with CNBC. He believes its artificial intelligence (AI) chips give it an advantage over competitors, such as Microsoft (MSFT) and Alphabet (GOOG, GOOGL).
AMZN stock today, July 7, is at $128.36 per share before market trading begins. In the last month, it is up just 1.9% or so and some fear that it may have peaked.
One way to play this is to short out-of-the-money puts for income. For example, market fears over Amazon's stance in relation to its peers may have helped push up put option premiums. As a result, it is not possible to make a 2.0% yield by shorting near-term puts that are 5% below today's spot price. More on this below.
Jassy Says Amazon's AI Chips Give it an Advantage
CEO Andy Jassy told CNBC that it is not only investing in AI across the company but also has developed its own AI-specific chips. These chips are known as Inferentia and Trainium and they are designed to help developers to run large AI language models in the cloud.
In addition, Amazon has its own generative AI service called Bedrock, which assists its client's language models to develop their own chatbots and image-generation services. In addition, Amazon has developed a program called CodeWhisperer for AI programmers. It develops and suggests code for AI developers.
Put Premiums Are High
Amazon stock seems to reflect some concern that it may have peaked. We discussed this in our last article on June 16, “Amazon Stock Keeps Rising, But It May Still Be A Good Time To Buy In.”
For example, the put options expiring July 7 at the $121 strike price, which was 4.8% below the spot price at the time, traded for $1.20 per contract. The $122 contract had a $1.44 premium as well.
These gave the short-put investor a 1.0% and 1.18% yield (i.e., $1.20/$121=1.0% and $1.44/$122 = 1.18%) for just 3 weeks until expiration. Today those puts expiring July 7 are now almost worthless, trading for just 2 cents or so. That means it was a very successful trade for investors.
However, today put premiums are even higher for expiration three weeks away. For example, the July 28 expiration period shows that the $122 strike price puts trade for $2.45. This strike price is 5% below the spot price just like before.
As a result, investors who short these puts can make $245 if they secure $12,200 with their brokerage firm and then enter an order to “Sell to Open” the $122 put. That shows that the yield is 2.0% with just 3 weeks until expiration.
Obviously, if the stock falls to $122 or lower, the trader takes a risk that they could have an unrealized capital loss. That would occur since the $12,200 per put contract will be used to buy the stock at expiration at $122 per share.
But keep in mind that the trader has a lower breakeven price. For example, taking into account the $2.45 premium already received, the actual breakeven level is $122-$2.45, or $119.55. This price is $8.81 below the price today of $128.36, or 6.86% below today's price.
Moreover, on top of this, even if that happens, the trader now owns 100 shares of AMZN stock. They can continue to hold the shares and sell out-of-the-money call options to generate further income. That will help improve any potential unrealized loss. This is known as the wheel strategy.
The bottom line is that traders can short OTM puts to generate extra income while they wait to see if AMZN stock has really peaked or not.
On the date of publication, Mark R. Hake, CFA 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.
