DailyPlay – Opening Trade (AMZN) – February 1, 2024

AMZN Bearish Opening Trade Signal

Investment Rationale

With the equity markets reaching all-time highs on the back of a tech-led A.I. rally, it’s hard not to draw parallels to the dotcom bubble and bust. We’ve started to see a little bit of the air taken out of the bubble. And AMZN’s earnings this afternoon present an opportunity to fade these extremes. While almost all of today’s tech and semiconductor companies generate significant revenue and profits — unlike the shells of the dot-com boom — the tech sector’s performance has many parallels to the late 90′s.

Additionally, as valuations continue to outpace revenue and EPS growth, the market seems to have reached a breaking point with. The recent negative reactions to Microsoft, AMD, and Alphabet earnings suggest that investors are no longer accepting valuations that are clearly well ahead of actual corporate earnings growth. In my opinion, while this AI revolution is well on its way, we are still in the early days of a disruptive technology. In the short run, there are opportunities to seek downside exposure during these times of excess, and as valuations pull back towards more realistic levels, it will ultimately provide a better buying opportunity in the long run.

Technical Analysis

While AMZN is technically a consumer discretionary stock, a large part of its valuation is derived from its cloud services business. As we see AMZN’s stock nearly double over the past year, it’s starting to look stretched to the upside and showing signs of exhaustion. We’ve seen high prices that are no longer coupled with momentum. Additionally, the relative performance of AMZN to the tech sector has no longer made new highs along with the absolute chart, suggesting distribution of the stock going into earnings. This increases the probability of a pullback rather than a breakout on earnings this week.

AMZN – Daily

Fundamental Analysis

The valuation of AMZN is another concerning factor, trading at 43x forward earnings, it trades at over a 100% premium to the market and its peers. While a premium valuation is expected with a 35% EPS growth that is expected for FY24, my concern is that there is a lot of room for downside. Especially if we consider how the market has reacted to UPS and MSFT earnings, which respectively provide a preview into AMZN’s eCommerce and Cloud businesses.

AMZN Trade Details

Strategy Details

Strategy: Short Call Vertical Spread

Direction: Bearish Credit Spread

Details: Sell to Open 2 Contracts March 15th $160/$175 Call Vertical Spreads @ $4.08 Credit per contract.

Total Risk: This trade has a max risk of $2,184 (2 Contracts x $1,092) based on a hypothetical $100,000 portfolio risking 2%. We suggest using 2% of your portfolio value and divide it by $1,092 to select the # contracts for your portfolio.

Counter Trend Signal: This is a bearish trade on a stock that is currently bullish but overbought.

1M/6M Trends: Bullish/Bullish

Relative Strength: 9/10

OptionsPlay Score: 97

Stop Loss: @ $8.16 Debit. (100% loss to the value of premium received)

View AMZN Trade

Entering the Trade

Use the following details to enter the trade on your trading platform. Please note that whenever there is a multi-leg option strategy, it should be entered as a single trade. 

Please note that these prices are based on Wednesday’s closing prices. Should the underlying move significantly during the pre-market hours, we will likely adjust the strikes and prices to reflect a more accurate trade entry. 

View AMZN Trade