Implied volatility on Amazon stock is reaching new lows. October options currently show an implied volatility of 23%, well below both one-month and 200-day figures of 31% and 38%, respectively.
The decline reflects calmer macroeconomic conditions, as well as the absence of an earnings report during this option cycle.
Even so, contracts still appear underpriced. Amazon shares have not seen volatility under 23% over any two-month period since 2021.
Investors looking to take advantage of this low volatility can consider two trades, with Amazon shares trading at 229 at Friday's close.
Investors that are neutral on the stock can consider a long straddle. A long straddle is an options strategy that takes no initial view on whether shares will rise or fall. Instead, it profits if the stock moves more than the market expects in either direction.
Using The Long Straddle
In the case of Amazon, investors can buy both the 230 call and 230 put expiring Oct. 17. This position costs about $16 a share, which equates to a maximum loss of $1,600 on a 100-share contract. That happens if Amazon stock closes exactly at 230 on expiration.
If Amazon makes a sharp move in either direction, gains can be substantial — potentially multiples of the initial investment. Break-even prices at expiration are roughly 214 on the downside and 246 on the upside.
With Amazon shares having broken out of a cup-with-handle pattern in June, and continuing to trade above both its 50-day and 200-day moving averages, investors also can consider a bullish trade to take advantage of continued momentum in the stock.
Buying a call option can take advantage of continued momentum higher while providing an attractive risk-to-reward, aided by the low volatility.
Buying The Call On Amazon Stock
Investors can consider buying the 240 call expiring Oct. 17, currently trading at $2.75. The price of the call equates to the maximum loss of $275 if Amazon is trading below 240 on expiry.
In the event of a sharp move higher, this out-of-the-money call will perform even better than the straddle. However, unlike the straddle, which will most likely have some value on expiration, the out-of-the-money call is most likely to expire worthless, similar to a lottery-like payoff structure.
Amazon stock currently has a Composite Rating of 96 from Investor's Business Daily and ranks fifth in IBD's retail-internet group. The group ranks 10th out of the 197 industries followed by IBD.
Steven Bell is a writer and trader based out of Vancouver, British Columbia. He is the author of IBD's Income Investor column, focused on shedding insight on low-risk, underfollowed stocks.
