Two Options Trades To Play The Upside In Amazon
After the pop in Amazon shares earlier this year, the stock has aroused my interest, but I've been patiently waiting for an entry. Overall on the longer term charts, AMZN continues to hold its long-term uptrend. Price has increased since January 2015, moving from $300 to above $385. Price in my opinion is consolidating and I am looking for AMZN to break out of this consolidation range to the upside.
AMZN has held up even when the broader market (S&P 500) has shown weakness or traded sideways. I like to watch for stocks that are showing relative strength when the market is volatile as they tend to have more persistent trends.
Amazon's long trend on both the weekly and daily charts is bullish. have been waiting for Amazon to pull back to around the 8-day exponential moving average for an entry to provide the best opportunity to get long without over paying. With the drop on Monday from $380 down close to $375, I believe this is the signal for an entry.
The exponential moving averages should provide price support at the $375 level where AMZN is currently trading. The 21-day exponential moving average is at $373, providing another level of support shortly below the 8-day exponential moving average.
To get long Amazon, I prefer to use options. One strategy is buying a $365 call with an expiry of May 15, 2015, for around $24. The call is an expensive option and because of the large initial investment required per contract, I will exit the trade if the price of the option declines to around $12, or if the price of AMZN falls to around $365. Since I believe AMZN has a long term trend as a backbone to support the trade, I like the idea of holding the call until I have made 50% profit or price hits $390.
As an alternative trading idea, a trader could also sell an at the money put credit spread at $370/$365 to maximize the and risk reward of the trade, taking in around $3.00 of credit. An at-the-money spread affords the advantage of receiving credit when you place the trade, while limiting your max potential losses. In this case $5.00 - $3.00 = $2.00 per contract risk. With a risk/reward ratio of a max gain of $3.00 and a max loss of $2.00, I like this risk/reward ratio. Because of the lower cost per contract of this trade setup I will be risking the entire amount of the spread or $2 per contract.
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