Amazon (AMZN) is stubbornly holding above the 50-day moving average with the company due to report earnings this week.
AMZN earnings are set for Tuesday after the close with the consensus for a gain of $7.05 per share on revenue of $120.36 billion. The options market is pricing in a 6.40% move in the stock in either direction. Implied volatility is elevated at 42.4%, much higher than the 29% seen only a few weeks ago.
High volatility results in high option premiums which can be good for bull put spread traders. A bull put spread is a defined risk option strategy that profits if the stock closes above the short strike at expiry.
To execute a bull put spread an investor would sell an out-of-the-money put and then buy a further out-of-the-money put.
Last week we looked at an example for Tesla (TSLA) stock earnings. This week let’s see how a bull put spread could be set up on Amazon stock.
Bullish AMZN Stock Option Trade
Traders who think AMZN stock will rally, or at least not drop by too much, could look to sell a Feb. 5 3,150 put and buy a Feb, 5 3,140 put.
As of Friday, this spread was trading for around $4.20 which means a trader selling this spread would receive $420 in option premium and would have a maximum risk of $580.
That represents a potential 72.40% return on risk in five days as long as AMZN stock remains above 3,150.
If AMZN stock closes below 3,140 on the expiration date the trade loses the full $580.
With this being such a short-term trade, there is no chance to adjust the trade if it goes bad. Trading options over earnings can be risky, so keeping position size small is a good idea.
I view these as fun trades that either work or they don’t and you have to be prepared to take the full loss if the stock drops.
Bearish option traders have so far done well from this bear call spread on Honeywell (HON).
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 Twitter at @OptiontradinIQ
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