Amazon stock recently broke back above the 50-day moving average and has shown improving relative strength. I'm willing to bet that the Magnificent Seven stock will remain strong between now and early next year, so let's look at a longer-term options play on Amazon stock.
Amazon has seen rising earnings per share in the last four quarters with each result exceeding analysts' expectations. From a technical perspective, Amazon stock is trading above the 21-day exponential moving average, as well as the 50- and 200-day moving averages.
Amazon Stock Today
When it comes to options, we normally look at short-term trades. The time frame goes anywhere from one week to one month. Today, we will look at a longer-term bull put spread. Longer-term option trades tend to move a little slower than shorter-term trades. That allows more time to adjust or close. But it also means a lower annualized return.
As a reminder, a bull put spread is a defined-risk strategy. So, you always know the worst-case scenario in advance.
This type of trade will profit if Amazon stock trades sideways or higher, and even sometimes if it trades slightly lower.
The Setup
With AMZN stock trading around 183, if we use the March 21 expiration, we can sell a put option with a 165 strike price and buy another put at 160 to set up the bull put spread. That spread is trading around $1.25, based on recent data.
Selling this spread would generate roughly $125 in premium per set of contracts. This trade holds a maximum risk of $375.
If the spread expires worthless, that would be a 33.3% return in six months provided Amazon stock is above 165 at expiration. That seems like a pretty reasonable bet to me.
The 165 strike put has a delta of 24, which means it has a roughly 76% chance of expiring worthless.
The maximum loss would occur if Amazon stock closes below 160 on March 21, in which the premium seller would lose $375 on the trade.
Break-Even Spot
The break-even point for the trade in Amazon stock stands at 163.75, calculated as 165 less the $1.25 option premium per contract.
I would set an adjustment point or a stop loss if AMZN drops below 170. Otherwise, another good rule of thumb is to limit the loss to the amount of premium received — in this case $125.
Sticking to this stop-loss level will help avoid large losses if the trade goes south.
According to IBD Stock Checkup, AMZN stock ranks No. 4 in its group and has a Composite Rating of 93, an EPS Rating of 81 and a Relative Strength Rating of 77.
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 X/Twitter at @OptiontradinIQ
