Amazon is set to report earnings on Thursday after the closing bell, and the options market is pricing in a 6.8% move in either direction. So today, we're looking at selling a cash secured put in Amazon stock.
Why do so? Take advantage of the high implied volatility around the earnings announcement.
Earnings season has brought increased scrutiny on Amazon's main business segments. Investors are closely watching Amazon Web Services (AWS) for stability, given its slower growth lately due to cautious enterprise spending. Analysts polled by FactSet project Amazon will post a 21% increase in earnings for the September-ended quarter, to $1.14 per share.
Additionally, Amazon's advertising segment is expected to contribute strongly as it gains market share in digital ads.
Amazon Stock: The Cash Secured Put
A cash-secured put involves selling an at-the-money or out-of-the-money put option in Amazon stock and simultaneously setting aside enough cash to buy shares.
The goal? Either have the put expire worthless and keep the premium, or to take assignment and acquire the stock below the current price. They are very similar to a covered call and are quite easy to understand once you know the basics. Anyone selling puts must understand he or she may be assigned 100 shares at the strike price per put option.
For Amazon stock, a trader selling the Nov. 15-expiration put with a strike price of 175 will generate around $290 in premium per contract, based on recent trading. The put has a delta of 22, which means there is an estimated 78% chance that it will expire worthless.
The put seller would have the obligation to purchase 100 shares of AMZN stock at 175 if called upon to do so by the put buyer. The break-even price for the trade can be calculated by taking the strike price less the premium received which in this case gives a break-even price of 172.10. That's 8.4% below Friday's closing price.
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Watch This Price Level
If the stock stays above 175 at expiry, the put option expires worthless. This leaves the trader with a 1.7% return on capital at risk. That works out to around 32% on an annualized basis. The main risk with the trade is similar to outright stock ownership. If the stock falls significantly, the trade will suffer a loss, however the loss will be partially offset by the premium received for selling the put.
Cash secured puts are a fantastic way to generate a return on stocks the trader is happy to own.
With this example, the trader generates a 1.7% return in a few weeks, or they get to purchase AMZN stock at a reasonable discount on the current price.
An Opportunity In Call Options Too
Also, if Amazon stock trades below 175 and the put gets assigned, investors can then sell covered calls against the position to generate further income.
IBD Stock Checkup notes Amazon stock ranks 3rd overall in its group. AMZN has a Composite Rating of 94, an EPS Rating of 82 and a Relative Strength Rating of 74.
Remember 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
