Amazon (AMZN) stock appears poised for a strong turnaround, and investors can use stock options to profit from such a move. The stock fell 40 points three times in the last month: from $840 to $800 after the earnings surprise in late October; from $800 to $760 the first week in November; and from $760 down to $720 by the middle of the month.
But in the last week, strong signals point to a strong bullish reversal. These signals appear on the chart.
The width of the Bollinger Band is 128.91 points, which is exceptionally wide even for Amazon. This extremely high historical volatility points to opportunities for timing a trade. Accompanying this are two bullish candlestick patterns. First was the piercing lines pattern, followed immediately by a harami. These mark the bottom of the strong downtrend.
This looks like the beginning of a new bullish trend. Options are expensive, however, so here is a way to take an inexpensive position that will perform well even with only a slight bullish move. The synthetic long stock position consists of a long call and a short put, both opened at the same strike price and expiration.
This options trade is given this name because the overall value in the synthetic long stock mirrors price movement in the stock. So a five-point upward move in the stock price will be accompanied by a similar increase in intrinsic value of the long call option. Of course, any downward move equals a similar increase in the short put's premium. To avoid exercise, the short put can be closed or rolled forward.
The position that seems the most advantageous is found with the Dec. 2 expirations, only 11 days away. The following positions create an at-the-money synthetic long stock trade:
Buy the 760 call option at an ask of 1,570. Including trading fees, this is a $1,579 debit.
Sell the 760 put option at a bid price of 1,415. Subtracting trading fees, this is a $1,406 credit.
The net debit is $173.
The break-even level on this trade is $761.73, and based on recent price activity, it would not take much for this trade to become profitable. The short put will experience rapid time decay and can be bought to close at a profit or allowed to expire worthless, as long as price remains at or above the 760 strike. The long call will appreciate rapidly with even a modest upward price move.