They say insanity is doing the same thing and expecting a different outcome. Bears keep trying to short Amazon.com, Inc. (NASDAQ:AMZN) even after a decade of being wrong still expect to be right. AMZN stock is down this morning, but I bet that even in the short-term, they’re wrong again this time.
Amazon reported disappointing profits last night, and the stock is down more than 3% Friday morning in response. The main concern is spending … so what else is news? I don’t think you can accomplish what AMZN has without spending a lot, and most of Wall Street agrees.
What pundits keep missing is that startup companies need to overspend. “Amazon isn’t a startup,” you say. False. Amazon still is a startup growth company because it’s perpetually entering new ventures. We still don’t need Amazon to be profitable, and yet, Amazon is profitable!
Click to Enlarge When Amazon stock fell to $800 on the February earnings report, I not only went long Amazon, but went on record saying it would climb $900 within weeks. Now here we are with the bears celebrating its fall to $1,010.
So, what do we do here? Same as always – buy the dip in AMZN stock!
Sorta.
I don’t buy into stocks and merely hope they rally. But when I see upside potential, I like to sell risk below levels that other people fear. For my risk, I collect a premium, and if I am right I keep it without ever owning any shares. I just bet on support levels holding, and where I place my risk determines how much premium I collect.
The closer we bet to the current price, the more risk I take on, thus the more premium I collect. But I also prefer to leave a big margin for error to the point that leaves me with 80% statistical odds of success or better.
Today isn’t an argument about value in AMZN stock. Amazon clearly is expensive, but Wall Street pays a premium for future prospects. And this company’s future is massive. Amazon boasts extreme growth in a multitude of industries that are not even tied to each other. Its latest success is in cloud services, making this e-tailer diversified even though it’s an extremely aggressive operator.
There’s always a risk of deep correction when a stock trades at 200 times earnings. I know that a 3% dip here isn’t a chasm, so it may not be the bottom of this wave. But given today’s fear, I bet I can build a buffer big enough to outlast the selling.
I also have to account for two more threats.
The first is from a market-wide equity correction. 蜜桃传媒s are stretched thin and are vulnerable for a correction sooner or later. And the second is that expectations are too high for AMZN. So this deflation may take some time to work itself out. After all, this is a stock that is 35% higher than 12 months ago even after this dip, so there is definitely room to the downside.
How to Trade AMZN Stock
The Bet: Sell the Dec $820 puts for $8 per contract to open. This is a bullish trade where I have an 85% theoretical odds of winning. I need price to stay above my strike so I can keep the whole premium as maximum gains. Otherwise I would accrue losses below $812.
Selling naked puts in Amazon stock requires hefty margin requirement to secure the trade. I can moderate the risk by selling a spread instead. By buying an equal number of puts below the ones I sell, I limit the total dollars at risk.
The safer Bet: Sell the AMZN $820/$815 credit put spread. Here I can yield 10% but without the massive risk. Compare this with buying the shares around $1,000, then hoping for a rally higher when the markets are already near all-time highs. Sounds a lot better, doesn’t it?
Selling options is risky business, so never risk more than you are willing to lose.
Learn how to generate income from options . Nicolas Chahine is the managing director of . As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him on Twitter at and stocktwits at .
