With its sky-high price almost touching $900, taking a normal position in this stock would be costly, but you don’t want to miss out on an investment with this much potential. Place the trade shared today to enter a position on this cash-cow stock for less.
When I was a floor trader on the CBOE back in the late 90’s, I was a market maker in Amazon.com options. We used to joke about how this internet company could be worth so much selling books and music online. Eventually, the bears won out and AMZN stock dropped below $10 a share during the dot com bust.
Yet, AMZN survived that tumultuous period and continued to not only grow its business, but also find new ways to generate revenues. Eventually, the company became the go-to online retailer for, well, just about everything possible.
Amazon also become one of the biggest providers of cloud-based services, with its Amazon Web Services division becoming a major contributor to the top (and bottom) line. The company also got into the tablet business (successfully) and the smartphone business (not so successfully), and is looking at grocery deliveries, physical book stores, and even delivery by drone.
At this point, you can’t count out this behemoth of a tech/retail company, which is now the sixth biggest company in the US by market cap. With a recent all-time high of around $875 per share, AMZN’s market cap reached a staggering $410 billion.
Sure, you’ll hear investors complaining about the company’s exorbitant P/E ratio, low ROE, or some other standard fundamental measurement. However, it’s obvious at this point that Amazon doesn’t play by the same rules as most companies. As long as CEO Jeff Bezos and management continue to find ways to grow the business, investors should continue buying the shares.
Let’s put it this way, just five years ago, you could’ve purchased AMZN shares for $175. That means if you held through today you literally would have earned $700 per share. That’s a staggering 400% return in 5 years. It’s no wonder investors continue to believe in the company…
Okay, so we’ve established that investors love AMZN and they’ve had good reason to do so. So what about you? How do you trade Amazon stock? Is it worth buying a stock at an all-time high and such a high price (in terms of absolute value – 100 shares for $87,500)?
Once again, this is where options come in to play.
Don’t forget, one of the most powerful reasons to use options is their leverage. One option contract is the equivalent of controlling 100 shares of stock. It makes it far more feasible to trade expensive stocks like Amazon or Alphabet (NASDAQ: GOOGL). The drawback of course, is a limited period of control. You’re trading time for leverage, so to speak. So, in order to pay a fraction of the price to control AMZN shares, you’re only buying a limited period of control.
Nevertheless, as much as the stock has been moving of late (higher), just about any reasonable call purchase would have paid off. In fact, someone just bet a decent chunk of cash that AMZN is going to continue to move in the coming weeks. In this particular case, the investor isn’t betting on a particular direction, just on the move in general.
The trade I’m speaking of is a 50-lot at-the-money (ATM) straddle purchase with a May expiration. Sure, 50 contracts doesn’t seem like a lot – until you look at the price. The ATM straddle (875 at the time of the purchase) means the investor purchased both the call and put at the 875 strike, expiring in May. The trade cost the buyer right around $60 per straddle. That’s $300,000 in cash for 50 straddles! The stock would need to go $60 in either direction for the trade to just break even ($815 or $935). It may seem like a big move, but just 3 months ago the stock was trading around $750 – so I wouldn’t bet against the straddle working.
Now, most of you are probably thinking $6,000 per straddle is too much to spend, and I would completely agree. So, how about looking at strangles instead? A strangle also bets on movement but uses out-of-the-money options instead of ATM to reduce costs.
For instance, the 840-915 strangle (20-25 strikes closer to the money than the above straddle’s breakeven points) costs just about $30 or $3,000 per straddle. Yes, that’s still expensive. However, it’s half the cost of the straddle and the breakeven points of $810 or $945 are close.
Is $3,000 too much to risk for one strangle. It all depends on how much you have to invest and your personal risk tolerance. The important thing to understand here is options can offer a variety of alternatives to fit your needs. With a little bit of research, I found a trade similar to the $60 straddle trade which costs half as much.
Depending of your time horizon, risk tolerance, and available capital, you very well could find an AMZN trade which suits your needs. Certainly, you have a heck of a lot more choices with options than just buying the stock.