Selling Puts on Amazon? It Might Be a Smart Move for Bulls

Amazon Founder, Chief Executive Officer, and President Jeff Bezos

Stocks are up moderately today as bulls attempt to resist a broader market sell-off. The Dow, S&P, and Nasdaq Composite are all trading higher as of noon to end the week on a high note.

Looking back, however, it’s been a bearish affair since last Thursday when Big Tech initially dragged equities lower.

Now, those same Big Tech stocks are barely staying above water. Facebook (NASDAQ: FB), Netflix (NASDAQ: NFLX), Google-parent Alphabet (NASDAQ: GOOG), and Microsoft (NASDAQ: MSFT) are up on the day slightly while Apple (NASDAQ: AAPL) and Amazon (NASDAQ: AMZN) continue to fall.

In other words, the tech bounce-back that analysts were waiting on hasn’t happened quite yet. ChartSmarter.com founder Douglas Busch sees the market’s recent performance as a potential hazard moving forward.

“The opposite of that action could be the definition of how the benchmarks fared Thursday,” he said in a note to clients.

“Decent early gains quickly faded, and as many stated last week’s lows were critical to hold. Perhaps, for the first time in a while, we can say advantage bears.”

Other analysts, like Gorilla Trades strategist Ken Berman, view today as one of several important trading sessions in terms of raw momentum.

“The next couple of sessions will be crucial in judging the possible extent of the pullback, and bulls will be looking for signs of positive divergences as the major indices approach their 50-day moving averages,” Berman said.

Want more FREE research and analysis on the best “unseen opportunities” in the markets?

The 50-day moving average (50-SMA) has long been held as a critical indicator by traders. For an uptrend, it serves as key support. For a downtrend, key resistance.

Crossing the 50-SMA often precedes trend reversals. In this case, the major indexes (along with most Big Tech stocks) are dangerously close to dropping beneath their respective 50-SMAs, signaling to investors that a bear market could be on its way.

But, if the tech sector survives and zooms higher next week – thus distancing itself from the 50-SMA – traders might want to consider different strategy, albeit a longer-term one:

Selling put options on Big Tech.

Puts, which give holders the right to sell a stock within a set price and time range, have seen their values erupt due to a surge in fear. Implied volatility spiked on tech options as a result of the sell-off hysteria, creating an interesting proposition for bulls.

For example, if an options trader sold an AMZN put, and the option expired with AMZN trading above the strike price, the trader would keep the premium. If AMZN’s trading below the strike price at expiration, the trader could buy the stock (or cover the put) at a higher price with the belief that it will eventually rise above the strike price.

It’s a technique Warren Buffett used to secure shares of Coca-Cola (NYSE: KO) at a discount in the early ‘90s. He did it again with Burlington Northern, two years before Berkshire Hathaway acquired BNI.

With Big Tech, selling puts helps bulls generate (relatively) “easy money” on premium stocks. The major drawback is, however, that the margin requirements – the percentage of marginable securities that an investor must pay for with his/her own cash – can be quite high for stocks like AMZN. Selling an October $3,160 strike put (priced at $169) would require roughly $63,000 in margin to do so, for a relatively small maximum gain of 21% ($16,900).

Still, it’s something tech bulls could utilize if the 50-SMA remains un-crossed. That all depends, though, on how stocks trade next week. Another dip would likely doom stocks to a larger correction, which could lead to some short-term headaches for investors.

No matter how many put options they are prepared to write.

[BRAND NEW] Click here to download our research report, "5 Stocks Poised To Soar During The Coming Recession"...

LEAVE A REPLY

Please enter your comment!
Please enter your name here