When looking for bearish option trade candidates, Amazon.com is one stock that might fit the bill.
On Wednesday, Amazon stock closed near the low of the day and broke below the 50-day moving average.
That type of action could spell more downside for the stock. Assuming traders have a price target of 85 for Amazon stock, they could look at a bearish calendar at that strike price.
A bearish calendar is negative delta and positive vega, so can do quite well when the stock drops.
Trade Uses Short-Term, Longer-Term Options
A calendar spread is a trade that involves selling a short-term option and buying a longer-term option with the same strike price.
Traders typically use call options unless the trade has a bearish bias, in which case they would use puts.
Let's take a look at an example of a bearish calendar spread on Amazon stock.
Based on Wednesday's closing prices, traders could sell the March 17, 85 strike put for around $0.75, then buy the March 31, 85 strike put for around $1.45.
That results in a net cost for the trade of $70 per spread, and that is the most the trade can lose.
Maximum Profit Of $200
The estimated maximum profit is around $200, but that could vary depending on changes in implied volatility.
Check out IBD's new OptionsTrader app for options education, trade ideas and more! Download from the Apple App Store today.
The idea with the trade is that if AMZN trades down around 85 in the next few weeks, the calendar spread will increase in value. That allows the trade to be closed for a profit.
The position starts with a delta of -6, meaning the exposure is roughly equivalent to being short six shares of Amazon. But this will change as the trade progresses.
According to the IBD Stock Checkup, Amazon stock is ranked No. 16 in its group and has a Composite Rating of 27, an EPS Rating of 13 and a Relative Strength Rating of 16.
Please remember that options are risky, and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on Twitter at @OptiontradinIQ
