Amazon (AMZN) stock is due to report earnings after the bell on Tuesday and the options market is pricing in 5.16% move in either direction.
AMZN stock has been lagging the broader market lately but is still holding above the 21-day, 50-day and 200-day moving averages.
Investors with a view that AMZN’s stock price will hold above the 50 and 200-day moving averages post earnings can express that view via an option trade known as a bull put spread.
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.
Traders who think Amazon’s stock price will continue to hold above 3200 could look to sell an April 30th 3200 put and buy an April 30th 3195 put.
As of yesterday, this spread was trading for around $1.50 which means a trader selling this spread would receive $150 in option premium and would have a maximum risk of $350.
That represents a 42.86% return on risk between now and April 30th as long as the price of Amazon’s stock (AMZN) remains above 3200.
If Amazon’s stock price closes below 450 on the expiration date the trade loses the full $370.
Conservative traders maybe prefer to wait to see if AMZN stock comes down a bit further in order to get a better price for the option spread.
The breakeven point for the bull put spread is 3198.50 which is calculated as 3200 less the 1.50 option premium per contract.
The trade has an initial delta of 1 which means it is roughly equivalent to owning 1 share of Amazon stock.
Trades like this can be a little hit or miss and leave very little room for adjustment once the earnings have been released, so it’s important to position size accordingly.
Traders also need to watch for assignment if AMZN drops below 3200.
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.
The author may have a position in mentioned securities at the time of publication. Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.