Keep an Eye on Amazon
Earlier this week, shares of Amazon.com (NASDAQ:AMZN) topped $1,000 for the first time ever. Traders began to pocket their returns almost immediately, sending the price careening down to $994.62. Will prices climb to $1,000.00 again? Almost certainly.
While nothing in life is guaranteed, there is relative safety in assuming Amazon’s stock price will make the jump to $1,000.00. It is, after all, one of the most successful companies of all time. Plus its business is still growing rapidly, so we can be reasonably assured of further gains.
What else does this information suggest? A straddling strategy, perhaps?
One idea is to treat it like an earnings announcement, but with a few minor tweaks to account for the uniqueness of the event. The position would still have the technical qualities of a straddle, in that the call and puts’ underlying asset, strike price, and expiration date are identical,
However, traders usually focus on implied volatility when it comes to earnings (or at least that’s what they should be focused on). Why? Because tensions run high before a quarterly report. Prices are bid up, the IV surges, and then...the stock barely moves. It happens more often than not, which ultimately kills the IV and erases any gains that could have arisen if the options moved “into the money.”
In other words, the size of the move is what matters most during an earnings play.
Straddling AMZN stock might require a small psychological shift. Rather than focusing on the size of the move, try a *time* focused strategy.
Try thinking of the expiration date as the most important factor in the position. Depending on your risk tolerance and cash flow situation, opening your time frame gives you multiple strategies. Shorterterm straddles are fairly inexpensive at the moment, but they could prove fruitful if the market has a big reaction to AMZN stock crossing the $1,000.00 level (again).
Longerterm straddles could prove even more profitable because investors have strange misconceptions about Amazon’s growth cycle. Many of them believe that AMZN stock will reach maturity as it crosses the $1,000.00 level, which leads to them underpricing call options that carry distant expiration dates. It is a common misconception.
Why Longer-Term Straddles Might Work on AMZN Stock
Unlike other companies its size, Amazon is not judged by its bottom line. It is judged by its top line. Revenue growth is the sole reason AMZN stock reached its current level, and it is the sole reason that AMZN stock will continue to climb.
To be sure, there were a few quarters where the market would have spanked Amazon for producing a net loss. Investors needed to see (at least the appearance of) profit generation.
Luckily the firm’s cloud computing business raked in enough profits to satisfy the market. But on the whole, I think the point stands. No one is expecting Amazon to announce a dividend or share buyback any time soon. It is supposed to keep investing operating profits into new businesses.
That is what Jeff Bezos does. He is one of the greatest capital allocators on the planet, bar none.
Even Warren Buffett is awed by his genius. “We haven't seen many businessmen like [Bezos],” said the Oracle (NYSE:ORCL) of Omaha in an interview last year. “Overwhelmingly, he's taken things you and I've been buying and he's figured out a way to make us happier buying those products, either by fast delivery or prices or whatever it may be, and that's remarkable.”
So we can take it on good authority that Amazon’s business is solid. Both ecommerce and cloud computing are still growing industries, not to mention that overseas expansion is a promising sign of growth. Amazon’s expansion into India is going particularly well.
In other words, there is every reason to believe that AMZN stock will continue to benefit from healthy fundamentals. Longerterm straddles aren’t priced to reflect this eventuality, because the market is skeptical of mature tech stocks. Thankfully for us, when it comes to Amazon, this fear is unfounded.
This guest post was written by Gaurav, security analyst for Profit Confidential. He advocates for commonsense, buy-and-hold investing. You can find his daily investment ideas and commentary at ProfitConfidential.com