Amazon stock has long been one of the strongest stocks in the market for a long time, but recent weakness has seen implied volatility go through the roof.
The stock has a current IV Rank of 93% which means that the current level of implied volatility is in the 93rd percentile of the range for the past twelve months. In other words, it’s high.
That could mean that it’s a great time to be a net seller of options via strategies such as iron condors, bull put spreads or bear call spreads.
The stock is currently below the 20-day and 50-day moving averages which could give the stock a short-term bearish outlook.
AMZN Bear Call Spread
A bear call spread is a defined risk option strategy that profits if the stock closes below the short strike at expiry.
To execute a bear call spread an investor would sell an out-of-the-money call and then buy a further out-of-the-money call.
On AMZN stock, a November expiry bear call spread could be set up using the 3700 strike as the short call and the 3750 strike as the long call.
I would look to sell that spread for $6.35 or higher depending on where the market trades tomorrow.
The maximum profit on the trade would be $635 per contract with a maximum risk of $4,365.
The spread would achieve the maximum 14.55% profit if AMZN stock closes below 3700 on November 20th in which case the entire spread would expire worthless allowing the trader to keep the $635 option premium.
The maximum loss would occur if AMZN stock closes above 3750 on November 20th which would see the premium seller lose $4,365 on the trade.
For a trade like this, I would set a stop loss if the spread doubled in value to around $1200.
Bullish traders could instead look at a bull put spread.
AMZN Bull Put Spread
Traders who think Amazon will rally could look to sell a November 2600 – 2550 put spread.
As of yesterday, this spread was trading for around $8.35 which means a trader selling this spread would receive $835 in option premium and would have a maximum risk of $4,165.
That represents an 20.05% return on risk between now and November 20th as long as Amazon remains above 2600.
If AMZN closes below 2550 on the expiration date the trade loses the full $4.165.
Setting a stop loss if the premium doubles would also make sense here to try to limit losses if the stock drops.
Traders who don’t want to take any directional exposure on the stock could of course combine the two spreads to form an iron condor.
AMZN earnings are scheduled for October 29th and that could provide a catalyst for the stock to make a big move. Trading options over earnings can be very risky.
Trade safe!
Disclaimer: The information above is for educational purposes only and should not be treated as investment advice. The strategy presented would not be suitable for investors who are not familiar with exchange traded options. Any readers interested in this strategy should do their own research and seek advice from a licensed financial adviser.
