Amazon stock (NASDAQ:AMZN) upward momentum, coupled with its position above key moving averages, presents an opportunity for strategic option plays aimed at securing a discounted stock purchase or capitalizing on sideways trading patterns.
Proposed Trade Structure
- Sell to open the AMZN May 17 put with a strike price of $160, valued at approximately $3.90.
- Sell to open the AMZN May 17 call with a strike price of $200, priced around $2.60.
- Buy to open the AMZN May 17 call with a strike price of $205, available at roughly $1.95.
Executing these maneuvers generates a total premium of $455 from the sold put and the bear call spread.
The trade’s initial delta sits at 20, equivalent to holding 20 shares of AMZN stock, with this figure subject to change throughout the trade’s lifecycle.
Anticipated Scenarios for the AMZN Option Trade
- Sideways Movement: If AMZN stock trades within the $160-$200 range at expiration, both the sold put and bear call spread expire worthless, resulting in a total profit equal to the premium received ($455).
- Stock Decline: Should AMZN fall below $160 at expiration, the sold put will be assigned, obligating the purchase of 100 shares at $160. However, factoring in the $455 premium received, the net cost basis becomes $156.45, representing a 9.8% discount from Tuesday’s closing price.
- Stock Rally: In the event of AMZN surpassing $205, the bear call spread will incur a maximum loss of $500, partly offset by the $455 premium received, resulting in a minor loss of $45.
Company Analysis
- Amazon.com is endorsed with a Barchart Technical Opinion rating of 100% Buy, accompanied by a strengthening short-term outlook.
- Implied volatility stands at 25.26%, with an IV Percentile of 13% and an IV Rank of 8.32%.
- The market outlook reflects an overbought condition, signaling vigilance for potential trend reversals.
- Analyst consensus predominantly favors AMZN stock, with 41 Strong Buy ratings out of 45, underlining positive sentiment toward its prospects.
Risk Mitigation
Option trades entail inherent risks, necessitating a well-defined risk management strategy. Some traders mitigate risk by incorporating deep out-of-the-money long puts, limiting potential losses below a specified threshold.
Conclusion
While this option strategy demands substantial capital commitment, it presents an avenue for generating income from desired stock holdings. However, it’s imperative to exercise caution, conduct thorough research, and seek professional advice before engaging in such endeavors. Remember, options trading carries risks, and investors may lose their entire investment. This article serves educational purposes and does not constitute a trade recommendation. Always perform due diligence and consult with financial experts before making investment decisions.
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