Amazon stock had a nice breakout Monday and now sits above its 21-day, 50-day and 200-day moving averages. There's a good chance Amazon will remain strong between now and early next year.
When it comes to options, we normally look at short-term trades, anywhere from one week to one month. This time, though, let's 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.
Maximum Risk Is $385
With Amazon stock trading around 219, we can sell a 185 put and buy a 180 with a March 21 expiration to set up the bull put spread. That spread is trading around $1.15. With one contract controlling 100 shares, selling this spread would generate roughly $115 in premium with a maximum risk of $385.
If the spread expires worthless, that would bring a return of nearly 30% in nine months, provided Amazon stock is above 185 at expiration. That seems like a pretty reasonable bet.
The 185 strike put has a delta of 21, which means it has a roughly 79% chance of expiring worthless. The maximum loss would occur if Amazon stock closes below 180 on March 21 which would see the premium seller lose $385 on the trade.
The break-even point for the trade is 183.85, which is calculated as 185 less the $1.15 option premium per contract.
It's best to set an adjustment point or a stop loss if Amazon drops below 200. Another good rule of thumb is to limit the loss to the amount of premium received, which in this case would be $115. Sticking to this stop-loss level will help avoid large losses if the trade goes south.
Amazon Stock: A Recent Swing Trader Addition
Amazon currently is part of Investor's Business Daily's SwingTrader. It was added to the portfolio June 27.
According to IBD Stock Checkup, Amazon ranks sixth in its group. It also has a Composite Rating of 93, an Earnings Per Share Rating of 78 and a Relative Strength Rating of 75.
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, 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.
