Amazon Options Bet Against Further Gains

Amazon

By Chris McKhann, analyst at OptionMonster.

Amazon(AMZN Quote) is trading lower on the day, and options action appears to be betting that it won't rise much further.

Amazon had been up as high as $90 in August before plummeting to a low of $34.68 on Nov. 20. It has been in a nice uptrend since then, currently trading at $55.21.

The options action involves a spread using the April 65 and 80 calls, with blocks of 10,000 of each trading within seconds. I initially thought this was a bullish vertical spread, but OptionMonster's systems show that the April 80 calls were bought for $1.34, the high price of the day.

That would indicate that this is actually a credit spread, betting that the stock will not rise above that 65 strike. Supporting this notion further is the fact that, with the stock down 2% on the day, the 80 calls are up in price while the 65s are down.

The April 65 contracts traded for $4.50, so the net credit would have been $3.16 on the $15 spread. A credit spread like this takes a full profit with the stock anywhere below $65. It will lose if shares are above $68.16 and will take a full loss of $11.74 with the stock anywhere above $80.

While probability is on the side of this trade, the risk/reward ratio is significant.

Elan

By Jon "DRJ" Najarian, cofounder of OptionMonster.