As the highly anticipated Prime Day on October 11 and 12, 2023, approaches, Amazon (NASDAQ:AMZN) stock is piquing the interest of investors. Trading at 2.3 times its sales and 42 times next year’s earnings, AMZN stock is catching the eye of those seeking investment opportunities. Additionally, short-put plays are emerging as a promising strategy for generating extra income for existing AMZN stockholders.
The attractiveness of this opportunity is rooted in the expectation that Amazon will report positive free cash flow (FCF) for the 12 months ending on September 30, following its positive performance in Q2. Some analyses suggest that AMZN stock could potentially be valued as high as $173 per share, a significant increase from its current price of $130.37.
One strategy that has gained attention is selling out-of-the-money (OTM) puts for income. For instance, the $124.00 strike price put options for the October 13 expiration period were highlighted as appealing, with a premium of $1.34 per contract. This approach offers several advantages. Firstly, the strike price is more than 5% below the current spot price, providing effective downside protection for the seller. Secondly, the $1.34 premium represents 1.08% of the $124.00 strike price. This allows the investor to earn 1.08% in income over a brief 3-week period (18 days).
On an annualized basis, if this trade is repeated every three weeks, the expected return would exceed 18.36% (1.08% x 17x), given that there are 17 periods of 3 weeks in a year.
Notably, the $124.00 strike put options have now dropped in value to just 18 cents, despite expiring in 3 days. Consequently, it appears prudent to roll over this trade by buying back the short calls and initiating new short positions in a fresh near-term period.
This rollover process involves “Buying to Close” the put contracts currently in play and then “Selling to Open” a similar number of contracts with different terms. For instance, the $122 strike price put options for the October 27 expiration period are now trading at $1.48 per contract.
This presents an opportunity for investors to achieve an immediate yield of 1.21% ($1.48/$122.00), with the strike price lying roughly 6% below the current spot price and only 17 days remaining until expiration. This approach is especially attractive for those looking to continue the trade they initiated earlier.
After accounting for the 18 cents spent to close out the previous trade, the net amount received remains substantial at $1.30. This yields a net return of 1.066%, which is very close to the previous yield of 1.08%. On an annualized basis, this translates to an enticing expected return of 18.1% (1.066% x 17x).
This strategy is particularly appealing for long-term investors in AMZN stock, given that Amazon does not currently pay a dividend. Consequently, it provides an avenue for shareholders to generate income without the risk of their shares being called away.
Featured Image: Unsplash @ Thibault Penin
Author Faith Yakubu 
