Copyright Investor's Business Daily
Amazon (AMZN) stock is set to report earnings on Thursday, Oct. 30, after the closing bell, and the options market is pricing in a 7% move in either direction. The implied volatility of the Oct. 31 options chain is sitting around 57%, while Amazon typically trades with an implied volatility of around 34%. With that in mind, investors can consider selling a cash-secured put to take advantage of the high implied volatility surrounding the earnings announcement. A cash-secured put involves selling an at-the-money or out-of-the-money put option and simultaneously setting aside enough cash to buy the stock. The goal is to either have the put expire worthless and keep the premium, or to take assignment and acquire the stock below the current price. They are very similar to a covered call and are quite easy for investors to understand once they know the basics. It's important that anyone selling puts understands that they may be assigned 100 shares at the strike price. For Amazon stock, a trader selling the Oct. 31 put with a strike price of 210 generated around $440 in premium per contract in this morning's trading. The put has a delta of 30, which means there is an estimated 70% chance that it will expire worthless. The put seller would have the obligation to purchase 100 shares of Amazon stock at 210 if called upon to do so by the put buyer. To calculate the trade's break-even price, take the strike price less the premium received, which in this case gives a break-even price of 205.60. That's 6% below the price this morning around 218.50. Potential Return On Capital If the stock stays above 210 at expiry, the put option expires worthless, leaving the trader with a 2.1% return on capital at risk in just over one week. That works out to an impressive 78% on an annualized basis. The main risk with the trade is similar to that of outright stock ownership. If the stock falls significantly, the trade will suffer a loss. However, the loss will be partially offset by the premium received for selling the put. Cash-secured puts are a fantastic way to generate a return on stocks the trader is happy to own. With this example, the trader either generates a 2.1% return in a few days, or they get to purchase Amazon stock at a reasonable discount on the current price. If Amazon stock trades below 210 and the put gets assigned, investors can then sell covered calls against the position to generate additional income. Find The Next Palantir, Nvidia, Or Hot IPO. Here's How. Investor's Business Daily gives Amazon stock a Composite Rating of 86 out of a best-possible 99, an Earnings Per Share Rating of 74 and a Relative Strength Rating of 58. According to IBD Stock Checkup, Amazon ranks ninth in its industry group. It's important to remember that options are risky and investors can lose 100% of their investment. This article is for educational purposes only and is not a trade recommendation. Remember to always do your due diligence and consult your financial advisor before making any investment decisions. Gavin McMaster has a masters in applied finance and investment. He specializes in income trading using options and is conservative in his style. He also believes patience in waiting for the best setups is the key to successful trading. Follow him on X/Twitter at @OptiontradinIQ. YOU MIGHT ALSO LIKE: Walmart Stock: This May Be The Best Defense As Markets Face Pressure Meta Stock: An Advanced Put Strategy Takes Advantage Of Pre-Earnings Volatility Strategy's Falling Stock Price Can Produce Profit Using A Bear Call Spread
