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Amazon and the Coming Onslaught

Can Amazon continue to grow and, more importantly, is Amazon a buy with its current 300+ PE ratio? Of course not: As Amazon's sales and revenue grow, they will increasingly run into Apple, Google, Target, Wal-Mart and others who will push back. If Amazon is able to grow its razor- thin margins, you can bet others that are much bigger and have the capability to dominate will emulate the model. Playing the game of ignoring the landscape where competitors include Wal-Mart, eBay, Target and many others is full of peril.

It's a no-win situation for Amazon's shareholders, and if they refuse to acknowledge the gravity of the situation, at least protect yourself from a catastrophic loss. You can do so in several ways. A common method is through "portfolio insurance" or buying put options.

The Amazon November $200 Strike puts can be bought for about $1.15 each. For about the price of a dollar menu item plus tax, you can ensure that you will cap your potential downside, and anything under $200 doesn't result in further losses.

A January $190 put will cost you about two dollar menu items including tax. If you think Amazon trading $190 can't happen, keep in mind that at $190, Amazon will still be more expensive than Google, Wal-Mart, Target, or Apple on an earnings basis.

I use a proprietary blend of technical analysis, financial crowd behavior and fundamentals in my short-term trades, and while not totally the same in longer swing trades to investments, the concepts used are similar. You may want to use this article as a starting point of your own research with your financial planner.

At the time of publication the author had no holdings in any stock mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

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