Long-Term Bull Put Spread Provides Opportunities for AMZN Bulls

Amazon (AMZN) recently reported better-than-expected earnings and revenue for the third quarter, driven by growth in its cloud computing and advertising businesses. 

Q3 earnings came in at $1.43 per share vs an estimate of $1.14 and revenue was $1.6 billion higher than expected.

Amazon is holding nicely above a rising 50-day moving average and looks to be setting up for a strong 2025.

COMPANY DETAILS

Amazon.com is one of the largest e-commerce providers, with sprawling operations spreading across the globe.

 Its online retail business revolves around the Prime program well-supported by the company's massive distribution network. 

Further, the Whole Foods Market acquisition helped Amazon establish footprint in physical grocery supermarket space. 

Amazon also enjoys dominant position in the cloud-computing market, particularly in the Infrastructure as a Service space, thanks to Amazon Web Services, which is one of its high-margin generating businesses. 

Amazon has also become a household name with its Alexa powered Echo devices. Artificial Intelligence backed Alexa is helping the company sell products and services. 

The company reports revenue under three broad heads' North America, International and AWS, respectively.

 Amazon targets three categories of customers - consumers, sellers and website developers.

AMZN BULL PUT SPREAD

Today, we’re going to look at a bull put spread trade, but instead of using a regular monthly expiration, we will look at a longer-term trade.

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 bullish trade that also can benefit from a drop in implied volatility.

The maximum profit for a bull put spread is limited to the premium received while the maximum potential loss is also capped. To calculate the maximum loss, take the difference in the strike prices of the long and short options, and subtract the premium received.

Implied volatility is currently sitting at 25.07% which gives AMZN and IV Percentile of 30% and an IV Rank of 11%.

To create a bull put spread, we sell an out-of-the-money put and then by a put further out-of-the-money.

If we go out to April, we could sell the April 17put with a strike price of $185 and buy the $180 put, which would create a bull put spread.

This spread was trading on Friday for around $1.00. That means a trader selling this spread would receive $100 in option premium and would have a maximum risk of $400.

That represents a 25% return on risk between now and April 17 if AMZN stock remains above $185.

If AMZN stock closes below $180 on the expiration date the trade loses the full $400.

The breakeven point for the bull put spread is $184.00 which is calculated as $185 less the $1.00 option premium per contract.

That breakeven price is around 11.5% below Friday’s closing price. 

Conclusion And Risk Management

One way to set a stop loss for a bull put spread is based on the premium received. In this case, we received $10, so we could set a stop loss equal to the premium received, or a loss of around $10.

Another way to manage the trade is to set a point on the chart where the trade will be adjusted or closed. That could be if the stock breaks through the key level of $195.

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.