Unusual In-the-Money Put Options Trades in Amazon Stock Show Investors Bullish

A Barchart report today shows a huge, unusual volume of in-the-money (ITM) put options in Amazon, Inc. (AMZN) stock. That implies that some institutional investors are happy to set a buy-in price for AMZN stock.

AMZN is up slightly today at $264.12 in midday trading, but it's off a recent peak of $274.99 on May 6. However, AMZN has moved up dramatically from a recent low of $199.34 on March 27, as can be seen in the Barchart chart below.

Amazon recently released tepid free cash flow (FCF) results on April 29, as I explained in a May 3 Barchart article, “Amazon's Massive Capex Spending Reduces FCF to a Trickle - But Does the Market Care?”

The article showed that the fair value of AMZN stock, based on its operating cash flow projections, despite higher capex over the next several years, is just $268.26 per share.

However, other analysts are more optimistic. For example, Yahoo! Finance reports that the average price target of 66 analysts is now $311.55 per share. That implies +17.7% upside in AMZN stock, and, indeed, is even higher than a prior price target of $307.60.

In addition, Barchart's mean analyst survey price target is now $315.53, up from $310.09.

This could be why some institutional investors have sold short in-the-money (ITM) puts today. That way, they have set a buy-in price while also collecting income.

Unusual In-the-Money (ITM) AMZN Puts Option Trading Today

This can be seen in today's Barchart Unusual Stock Options Activity Report. It shows that almost 7,000 put options have traded at the $285.00 strike price expiring June 5, i.e., 18 days from now. 

That represents almost 60 times the prior number of put options contracts outstanding at that exercise price for June 5. So, it is highly unusual.

Moreover, the $285.00 strike price is almost $20 higher than the trading price of $265.12. The premium represents this, at $20.10 at the midpoint.

So, a short-seller of these puts gains that income, but is likely to have their contract assigned. Here is how that works out:

  $285.00 strike price - $20.10 (midpoint premium received) = $264.90

  $264.90 - $265.12 trading price = -$0.22, or -0.08% lower

Why an Investor Would Short ITM AMZN Puts

In other words, the short seller of these puts gains a 22-cent lower buy-in point, after accounting for the income received. Why would they do this?

Perhaps they are hoping that AMZN stock will continue to rise over the next 18 days. That allows them to have a much lower set buy-in point.

However, the risk is that AMZN falls below the $264.90 breakeven point. That would result in an unrealized loss.

So, that is a real downside risk. Perhaps the investor has also bought out-of-the-money (OTM) puts at a lower strike price to help mitigate against some of this risk.

Nevertheless, if AMZN rises, the AMZN premium price will fall. This would allow the investor to potentially “cover” their trade at a profit by entering an order to “Buy to Close” the puts.

Investors doing this play have a reasonably bullish outlook on AMZN stock. However, investors should be careful copying this play. It is highly speculative and could result in an unrealized loss. 

However, it does show that sometimes it makes sense to use ITM puts if you are otherwise willing to buy shares at today's price.

The bottom line is that this shows institutional investors are bullish on Amazon for the next 18 days. That could help put upside pressure on AMZN stock.