Consumer Anxieties Translate to Rising Put Volume for Amazon (AMZN)

During the initial onset of the COVID-19 crisis, the viability of most businesses was immediately suspect due to the obvious headwinds for the economy and social mobility. However, Amazon (AMZN) represented one of the few companies that only suffered a brief blip of negative trading before rising remarkably higher. Buoyed by the inherent facilitation of contact-free transactions, AMZN stock quickly grabbed the market spotlight.

Currently, it’s still doing so but for the wrong reasons. After jumping to record valuations, Amazon now faces an unwinding of its post-pandemic returns. To be fair, recent momentum is strong for AMZN stock, with the security jumping 23% in the trailing month through July 29. However, even with this spike, AMZN is still down nearly 21% on a year-to-date basis.

With 20% down being an unofficial barometer of a bear market cycle, technical analysts are concerned about the ability for AMZN stock to continue moving higher. However, the fundamentals are arguably much more important. Here, big-box retail rival Walmart (WMT) provided less-than-thrilling news about the consumer economy. In a press release, Walmart CEO Doug McMillon had this to say:

The increasing levels of food and fuel inflation are affecting how customers spend, and while we've made good progress clearing hardline categories, apparel in Walmart U.S. is requiring more markdown dollars. We're now anticipating more pressure on general merchandise in the back half; however, we're encouraged by the start we're seeing on school supplies.

In other words, consumers are still ponying up the cash for necessary goods, such as education-related products. However, when it comes to the discretionary segment such as fashion and apparel, people are turning their backs. It would appear that options traders also got the message.

Put Option Volume Rises for AMZN Stock

Once the dust settled on the Friday, July 29 session, Barchart.com’s screener for unusual options activity lit up for AMZN stock. Although the action featured trades from both sides of the bull/bear aisle, one couldn’t help but notice that put options dominated the proceedings.

In terms of the most high-volume puts that have yet to expire, bearish traders piled into the $135 put option with an expiration date of Aug. 5, 2022. Volume hit 22,808 contracts against an open interest reading of 149. With a closing price of $134.95 on July 29, these puts are just barely in the money.

For the most high-profile bullish trade, the optimists moved into the $136 call option featuring an expiration date of Aug. 5, 2022. Volume reached 28,848 contracts against an open interest reading of 503. Here, the circumstances are almost flipped relative to the bearish trade, with AMZN stock just outside the realm of profitability.

Regarding the aforementioned put option, the bid-ask spread as represented by the midpoint price ($2.61) was 4.21%. For the call option, the spread represented by the midpoint price ($2.25) was 8%. All other things being equal, market makers consider the puts to be an easier transaction to facilitate.

Still, it’s fair to point out that covering analysts still maintain a “strong buy” average rating for AMZN stock. Indeed, regarding the extremes of the ratings spectrum, there are 25 strong buys as opposed to only one strong sell.

Then again, the put/call open interest ratio is 0.86, indicating that a growing number of traders are buying more puts than calls. Therefore, investors need to exercise caution before diving into the supposed discount of AMZN stock.

Inflation Continues to Impose Significant Problems

Over the 12 months ended June 2022, the U.S. Bureau of Labor Statistics reported that the consumer price index increased 9.1%. Not surprisingly, the biggest culprits to the hit that Americans have felt in their wallet are energy and utility services.

Overall, energy costs increased 41.6% year-over-year, with the subcategory fuel oils and other fuels rising 70.4%. Though somewhat cheaper, utilities presented a substantial increase in costs, rising 38.4% YOY. The biggest concern for those seeking to advantage investments like AMZN stock is that energy-related expenses are unavoidable. You’re simply not going to get far in this modern world without power.

Unfortunately, this money drain leaves very few funds available for discretionary purchases. That’s why Walmart’s warning is significant. If the company that popularized the concept of everyday low pricing is struggling to move its relatively low-cost discretionary goods, other consumer-facing companies like Amazon are likely to encounter substantial challenges.

 If that wasn’t worrying enough, the Federal Reserve’s decision to raise the benchmark interest rate will have downwind impacts, including higher borrowing costs for those that carry balances on their credit cards. Such a dynamic further reduces the incentive for making discretionary purchases.

A Reason for the Bearishness

Throughout the post-COVID new normal, many investors profited handsomely from deliberately trading against the prevailing trajectory, leading to the meme-stock phenomenon that has gained both popularity and notoriety. However, making contrarian trades simply for their own sake may not be the wisest decision.

Of course, every investor will have to make their own choice. Still, the bearishness in AMZN stock appears to be tied to fundamental realities. Going against this tide – at least for the moment – could be treacherous for one’s portfolio.

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