[Options] Getting Into the Amazon

Sean McLaughlin
December 18, 2019

There's been lots of frustrating talk about companies with high share prices not splitting their stock. I tend to agree. While technically splitting shares of a stock doesn't do anything to enhance the value of your investment, it does help to provide greater liquidity for one to get into or out of a position quickly and at a fairer price.

But this is an argument for academics. We're just here to make money.

Perhaps you've seen JCs recently bullish post on Amazon $AMZN and you agree that you'd like to take a long position, but the high share price scares you?

Well, one way to mitigate the high cost of AMZN shares is to leverage into a position using long call options. As with any options trade, there are pros and cons for doing so. But in my opinion, the benefits definitely outweigh the risks.

Let's get into an example:

One could invest in 100 shares of $AMZN stock at approximately $1800 per share. This would represent $180,000 in equity risk. And that risk is entirely borne by the trader. Yes, the trader can put a stop loss in to protect against potential downside, but a stop loss does not guarantee a fill at the price you want. You're fully exposed to overnight gap risk. Pretty hefty for many trading accounts.

Or, one could buy a July 2000 strike call for approximately $59.00. This would cost $5,900 -- about 3% of current prices for $AMZN stock.

This July 2000 strike sports an approximately 25 delta, meaning the value of the option would increase or decrease approximately $25 for every $100 move in $AMZN stock price. The $5900 paid for the call also represents the most you could possibly lose in this position. AMZN can go bankrupt overnight (LOL) sending the stock near zero, but still the most you would lose is the $5900.

On the flip side, if AMZN rises, not only will you get to participate in the rise, but the currently 25 delta calls will gain deltas as AMZN approaches the 2000 strike price, meaning the higher AMZN goes, the faster the call options could potentially increase in value.

What makes this idea especially compelling right now is that volatility being priced into AMZN options is the lowest it's been all year. This means, on a relative basis, this is the cheapest AMZN calls options have never been all year. In other words, this is the BEST time to be a buyer of long call options.

So, to sum up, we think $AMZN July 2000 strike calls at $59.00 offer a great opportunity to participate in a potential upside breakout we at All Star Charts think is on deck soon for Amazon.

~ @chicagosean

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