3 Options Strategies For AMZN Stock This Week

Amazon (AMZN) closed back above the 200-day moving average today. The Barchart Technical Opinion rating is a 24% Buy with a Weakest short term outlook on maintaining the current direction. Amazon rates as a Strong Buy according to 27 analysts with another 4 analysts rating the stock a Moderate Buy.

Implied volatility is 29% which is in the middle of the twelve-month range of 18% to 46%. So, which option strategies might be appropriate in this case?

Today, we will analyze three different ideas:

1. A high reward bull call spread
2. A bullish calendar spread
3. A neutral to slightly bullish put spread

Bull Call Spread

The first strategy is a bull call spread. A bull call spread is created through buying a call and then selling a further out-of-the-money call. Selling the further out-of-the-money call reduces the cost of the trade but also limits the upside. A bull call spread is a risk defined trade, so you always know the worst-case scenario. Bull call spreads are positive delta (bullish) and positive vega (benefit from a rise in implied volatility).

Going out to March expiration, a 3600-strike call option was trading around $94 yesterday, and the 3650 call was around $79.50. Buying the 3600 call and selling the 3650 call would create a bull call spread. The trade cost would be $1,450 (difference in the option prices multiplied by 100), and the maximum potential profit would be $3,550 (difference in strike prices, multiplied by 100 less the premium paid).

A bull call spread is a risk defined strategy, so if AMZN stock closes below 3600 on March 18, the most the trade could lose is the roughly $1,450 premium paid. Potential gains are also capped above 3650, so no matter how high AMZN stock might go, the most the trade could profit is $3550.

In terms of trade management, if the spread dropped from $1450 to $725, or if the stock dropped below 3200 (yesterday’s low), I would consider closing early for a loss. 

Let’s take a look at another potential option strategy.

Bullish Calendar Spread

Assuming a trader has a target price for AMZN of 3700, they could set up a bullish calendar spread centred at that price.

A calendar spread is a trade that involves selling a short-term option and buying a longer-term option with the same strike price. Bullish calendar spreads are positive delta (bullish) and positive vega (benefit from a rise in implied volatility). Selling the February 18, 3700-strike call option will generate around $4,300 in premium, and buying the March 18, 3700-strike call will cost around $6,650.  That results in a net cost for the trade of $2,350 per spread, which is the most the trade can lose.

The estimated maximum profit is around $8,500, but that can vary depending on changes in implied volatility.  The idea with the trade is that if AMZN trades up to around 3700, the calendar spread will increase, resulting in a net profit.

A bullish calendar spread is a good way to gain some upside exposure on a stock without risking too much if the move doesn’t eventuate. 

The ideal scenario is a rise up to 3700 around March 18 with little change (or a rise) in implied volatility. The combined position has a net delta of 5, which means the trade is roughly equivalent to owning 5 shares of AMZN stock, although this will change as the trade progresses.

For a trade such as this, I would set a profit target of 30% and a stop loss of 20%. The final idea we will look at is a bull put spread option trade.

Bull Put Spread

A bull put spread is a defined risk option strategy that profits if the stock closes above the short strike at expiry. To execute a bull put spread an investor would sell an out-of-the-money put and then but a further out-of-the-money put.

Selling the February 3140 put and buying the 3120 put would create a bull put spread. his spread was trading today for around $4.10. That means a trader selling this spread would receive $410 in option premium and would have a maximum risk of $1,590.

That represents a 26% return on risk between now and February 18 if AMZN remains above 3140. If Amazon closes below 3120 on the expiration date the trade loses the full $1,590.

The breakeven point for the bull put spread is 3,135.90 which is calculated as 3140 less the 4.10 option premium per contract. This bull put spread trade has a delta of 2 which means it is a similar exposure to owning 2 shares of AMZN stock, although this exposure will change over time as the stock price moves.

In terms of a stop loss, if the spread increased in price from $4.10 to $8.20, I would consider closing early for a loss. Using options in this way can be a great way to gain exposure to a stock without risking as much capital as would be required to buy the stock outright.

Conclusion

There you have three different bullish trade ideas for AMZN stock, but you can use these strategies on any stock with a bullish outlook. One thing to watch out for with Amazon options is the bid-ask spread which can make it hard to get filled for a good price.

Earnings are estimated for late January, so these trades would have earnings risk if held to expiration.

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.

*Disclaimer: On the date of publication, Gavin McMaster did not have (either directly or indirectly) any positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. Data as of after-hours, Jan 3, 2022.