When looking for candidates for bearish option trading, Amazon.nl (AMZN) is a stock that might fit the bill.
On Wednesday, Amazon stock closed near the day’s low and broke below its 50-day moving average.
That kind of action could have more downside for the stock. Assuming traders have a price target of 85 for Amazon stock, they could be looking at a bearish calendar at that strike price.
A bearish calendar is negative delta and positive vega, so can do quite well if the stock falls.
Trading uses short-term and longer-term options
A calendar spread is a trade in which a short-term option is sold and a longer-term option is bought with the same strike price.
Traders typically use call options unless the trade has a bearish bias, in which case they would use puts.
Let’s look at an example of a bearish calendar spread on Amazon stock.
Based on Wednesday’s closing prices, traders could sell the March 17 85 put for approximately $0.75, and then buy the March 31 85 put for approximately $1.45.
That results in a net cost to the trade of $70 per spread, which is the most the trade can lose.
Max win of $200
The estimated max win is around $200, but that may vary depending on implied volatility changes.
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The thinking in trading is that if AMZN drops around 85 in the coming weeks, the calendar spread will increase in value. This allows the trade to be closed with a profit.
The position starts with a delta of -6, which means that the exposure is roughly equivalent to a short position of six shares of Amazon. But this will change as the trade progresses.
According to the IBD Inventory ControlAmazon stock ranks #16 in its group and has a composite rating of 27, an EPS rating of 13 and a relative strength rating from 16.
Keep in mind that options are risky and investors can lose 100% of their investment.
This article is for educational purposes only and not a trading recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
Gavin McMaster holds a Masters in Applied Finance and Investments. He specializes in income trading using options, is very conservative in his style and believes that patience in waiting for the best setups is the key to successful trading. Follow him on Twitter @OptiontradinIQ
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