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Amazon (AMZN) stock looks attractive to some investors ahead of Prime Day on Oct. 11 and 12, 2023. AMZN stock is at 2.3x sales and 42x next year's earnings. Short-put plays also look like a good bet here for extra income for existing AMZN stockholders.
This is based on the belief that Amazon will report positive free cash flow (FCF) for the 12 months ending Sept. 30. as it did for Q2. In fact, I discussed this in my Aug. 4 Barchart article, “Amazon Stock Soars as It Returns to Positive Free Cash Flow, But It's Still Cheap.”
I showed how AMZN stock could potentially be worth as much as $173 per share, up from $130.37 today.
Selling OTM Puts for Income
Moreover, in my Sept. 25 Barchart article, I discussed shorting out-of-the-money (OTM) puts for income. For example, I pointed out that the $124.00 strike price put options for the Oct. 13 expiration period were attractive at a premium of $1.34 per contract.
That was a good play for two reasons. First, the strike price was over 5% below the spot price, meaning that its out-of-the-money (OTM) width provided good downside protection for the short seller.
Second, the $1.34 premium represented 1.08% of the $124.00 strike price. The investor selling these puts short could make 1.08% in income over a less-than 3-week period (18 days).
So, on an annualized basis, if the investor can repeat this trade every 3 weeks, the expected return will be over 18.36% (i.e., 1.08% x 17x), since there are 17 periods of 3 weeks in a year.
The good news now is that those puts are trading for just 18 cents today. Most of the money has been made even though the trade will expire in 3 days (this Friday). As a result, it probably makes sense to roll this trade over by buying back these short calls and shorting them in a new near-term period.
This is done by entering an order to “Buy to Close” these put contracts. Then enter a new order to “Sell to Open” a similar number of contracts.
For example, the $122 strike price put options for the Oct. 27 expiration period are now trading even higher at $1.48 per contract.
This means that an investor can make an immediate yield of 1.21% (i.e., $1.48/$122.00). This strike price is about 6% below today's spot price with just 17 days left before the option expires.
That makes it ideal for a person who wants to roll over the trade they made earlier. They will have to spend 18 cents to close out the prior trade. So the net amount received will be $1.30.
That still gives them a good net yield of 1.066%, close to the prior yield of 1.08%. On an annualized basis, that still works out to an attractive expected return of 18.1% (i.e., 1.066% x 17x).
That is a very good return for most investors on a long-term basis. That is especially good for existing shareholders in AMZN stock since the dividend yield is 0% at the present time (Amazon doesn't pay a dividend).
In other words, this is a way for shareholders to collect income without having any risk that their shares could be called away.
On the date of publication, Mark R. Hake, CFA did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
