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Investors Business Daily
Investors Business Daily
Business
GAVIN McMASTER

Amazon Stock Is Struggling With This Price Level. This Trade Capitalizes On The Sluggish Action.

Amazon stock broke through key support levels on Tuesday and has been showing signs of distribution since early September. Amazon has also seen a declining relative strength line during that time frame.

Now, I'm looking at a bear call spread that assumes Amazon will struggle to get back above 240 between now and mid-November. A bear call spread involves selling an out-of-the-money call and buying a further out-of-the-money call.

 

Assembling An Amazon Bear Call Spread

The strategy can be profitable if the stock trades lower, sideways, and even if it trades slightly higher, as long as it stays below the short call at expiry.

A Nov. 21 expiry bear call spread on Amazon stock using the 240-245 strike prices can be sold for around $1.25.

Traders selling the spread would receive $125 in option premium which is also the maximum possible gain. The maximum loss would be $375. That represents a potential return of 33.3% between now and Nov. 17.

The spread will achieve the maximum profit if Amazon stock closes below 240 on Nov. 17, in which case the entire spread would expire worthless, allowing the trader to keep the $125 option premium. 

The maximum loss will occur if Amazon closes above 245 on Nov. 17, which would see the premium seller lose $375 on the trade.

While some option trades have the risk of unlimited losses, a bear call spread is a risk-defined strategy, and you always know the worst-case scenario in advance.

A stop loss could be set if Amazon trades above 230, or if the spread value rises from $1.25 to $2.50.

Bear call spreads can be a good way to potentially generate some income while a stock remains in a downtrend.

E-Commerce Heavyweight's Ratings At IBD

Investor's Business Daily gives Amazon stock a Composite Rating of 84 out of a best-possible 99, an Earnings Per Share Rating of 74, and a Relative Strength Rating of 49. According to IBD Stock Checkup, Amazon ranks 14th in its group. 

Amazon is due to report earnings in late-October, so this trade would have earnings risk if held to expiration. 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 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, and is conservative in his style. He also believes patience in waiting for the best setups is the key to successful trading. Follow him on X/Twitter at @OptiontradinIQ.

 

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