Amazon.com is set to report earnings on Thursday after the market close, and the options market is pricing in a 6.6% move in either direction for Amazon stock.
Today, we're looking at selling a cash secured put to take advantage of the high implied volatility around the earnings announcement.
A cash-secured put involves selling an at-the-money or out-of-the-money put option and simultaneously setting aside enough cash to buy the stock.
The goal is to 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.
It's important that anyone selling puts understands they may be assigned 100 shares at the strike price.
Amazon Stock Option Trade Setup
For Amazon stock, a trader selling the Feb. 2 put with a strike price of 155 would generate around $3.40 in premium per contract based on late-Friday quotes.
The put seller would have the obligation to purchase 100 shares of Amazon at 155 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. In this case, that's a break-even price of 151.60. That's 4.73% below Friday's closing price.
If the stock stays above 155 at expiry, the put option expires worthless. That leaves the trader with a generous 2.24% return on capital at risk. That works out to around 116.48% 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.
Great Way To Generate Returns
Cash secured puts are a fantastic way to generate a return on stocks the trader is happy to own.
With this example, the trader either generates a 2.24% return in five days, or he or she gets to purchase Amazon stock at a reasonable discount to Friday's price.
If Amazon stock trades below 155 and the put gets assigned, investors can then sell covered calls against the position to generate further income.
According to the IBD Stock Checkup, AMZN stock is ranked number 3 in its group and has a Composite Rating of 94, an EPS Rating of 82 and a Relative Strength Rating of 91.
It's important to 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
