Despite shares of e-commerce giant Amazon.com losing over half their value this year, the pain may only be starting. Amazon stock was down about 1.4% Friday morning.
With a price-to-earnings valuation of 4.8 times the S&P 500's, one would expect Amazon to be the market's hottest growth stock. However, with revenue growth slowing and costs increasing, Amazon stock will be in for a slog to deliver on investors' lofty expectations.
Where's The Growth For Amazon Stock Now?
Jeff Bezos founded Amazon in 1994, selling books from his garage, and transformed the e-commerce giant into one of the world's most prolific companies. Amazon.com currently dominates the e-commerce space. As of June, the company was responsible for over 37% of total U.S. e-commerce sales. Second-place Walmart is miles behind at only 6%.
This success has led Amazon stock to a challenging predicament that many other megacap stocks also face: continuing to grow while already dominating market share.
With a recession looming and interest rates nearing 5%, a P/E ratio of 75 certainly seems expensive for Amazon stock. For investors expecting further weakness in the company, buying a put option makes sense.
Buying Put Option On Amazon
Looking out a bit longer in the future, investors can buy a 70 put for the Sept. 15 expiry for $5.50. The total cost of this put is $550 for a block of 100 shares, which also equates to the maximum loss for this trade if Amazon trades above 70 on expiry.
This trade will break even if AMZN trades at 64.50 on expiry, and could gain multiples of value if shares collapse.
From a volatility perspective, the Sept. 15, 70-strike put has an implied volatility of 46%. Realized volatility is 43% and 50% for 30 and 252 days, respectively. Considering this put has a delta of only 25 (at-the-money volatility for September is 42%), it certainly does not look expensive.
As opposed to shorting shares, the advantage of buying a put option is that the maximum risk is clearly defined.
By choosing a put with a longer time to expiry, investors do pay a bit more premium but have more time for their view to be right. This can often allow for opportunities to take profits early if the trade moves in their favor.
Shares of Amazon stock are trading just above 52-week lows, down over 50% year to date. Its Composite Rating has slumped to 40, and the stock's Relative Strength Rating, a gauge of price strength, is a woeful 14.
