Amazon is Slowing, But AMZN Stock Treads Water - Good for Short Put Plays

Amazon's (AMZN) results on Feb. 2 came in below expectations but its revenue and FCF slowing were not disastrous. As a result, AMZN is treading water, which is good for short-put plays for income.

Amazon's North American revenue was powerful with a 13% year-over-year (YoY) gain. However, its profitable AWS division showed decelerating revenue growth. For example, revenue was up just 20% YoY, whereas last quarter AWS showed 27% YoY revenue growth.

In fact, one analyst, Genevieve Roch-Decter, CFA, in her popular GRIT Capital Substack blog said that “all four major segments (NA Retail, International Retail, AWS & Advertising) delivered sharply decelerating growth.” Nevertheless, she said that Amazon still has very strong competitive positions in Retail, Cloud & Advertising and has a very powerful business model in terms of growth & FCF generation. She concluded by saying this: 

“Was this a miss? Yes. Was it catastrophic? No.”

As a result, AMZN stock, after initially moving higher after the results, has come down to where it was before the earnings release. On Tuesday, Feb. 7, AMZN is just below $100 at $99.96 per share. This shows that the stock is essentially treading water. That is very good for out-of-the-money short-put investors.

Creating Income By Shorting Out-of-the-Money AMZN Puts

Last month on Jan. 10, my article on AMZN puts showed that shorting Feb. 10, 2023, expiration $80 strike price puts would be profitable. It was treading for $2.12 per contract and at the time, AMZN stock was 10% higher at $89.12 per share. This worked out to a 2.65% yield on the put strike price, and a 2.38% yield on the spot price.

Today those puts are trading for about 1 cent, and will likely expire worthless. That means the short-put investor will be able to keep the whole amount and not have to buy back the short trade to cover it. That means the trade was extremely profitable.

Investors can now look at the March 10, 2023, put options to do a similar rollover trade. For example, the $92.00 strike price premium is $1.67 per put contract, and the $91.00 strike price has a $1.46 premium.

This means that the investor who puts up $9,200 in cash and/or margin with his or her brokerage firm account, and then puts in an order to “sell to open” 1 put at the $92.00 strike price will immediately receive $167 in the account. That works out to an immediate yield-to-put metric of 1.815% (i.e., $167/$9,200). The yield-to-spot price is 1.67% (i.e., $1.67/$99.96 spot price). If this can be repeated each month for a year, the annualized yield is 21.78% on a yield-to-put basis.

A slightly more conservative play is to short the $91.00 put and receive $1.46. That works out to a yield-to-put metric of 1.604% (i.e., $1.46/$91.00). That works out to an annualized potential return of 19.3%.

Both of these short-put income plays are relatively low risk. For example, AMZN stock would have to fall by over $10.00 to $89.54 before the investor even begins to lose money with the $91.00 short put play. That means it would have to fall by 10.4% from $99.96 today. And the contract expires worthless in 31 days if this does not happen, giving the short put trade investor a clear win.

On the other hand, if AMZN rises significantly the investor will not make any kind of unrealized capital gain that a long investor in AMZN stock will make. That is why some investors who are long the stock also short out-of-the-money puts as well. They want to create income and also have the opportunity to make money on the upside. If AMZN stock falls below 10.5% they will be happy to buy more AMZN stock at a lower once their put trade is exercised.

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