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A Prime deal for Amazon’s stock

By Lee Lowell  |  July 19, 2018

You might have missed the meat of this year’s Amazon Prime Day, which ran for 36 hours on Monday and Tuesday of this week.

Don’t worry – odds are you can still score some good deals.

Wall Street estimates aren’t necessarily predictive of future results. But Amazon cleared $2.41 billion in sales during last year’s Prime day, and the consensus estimate for this year’s shopping frenzy came in at $3.4 billion. That’s a very tidy 41% increase.

Sales in the first 12-hour period this year were 69% higher than last year, so I’d say Prime Day enjoyed a strong start.

Amazon also issued a press release stating that the company had sold over 100 million products. Medium and small businesses sold over 1 billion items on Prime Day, though numbers from last year aren’t available for comparison.

That’s just insane! We sure do love our online shopping.

I’ve discussed Amazon specifically in The Rich Investor here and here, and it seems there’s no stopping this juggernaut.

With the stock price hitting all-time highs near $1,846 yesterday, it’s getting well out of range for the average investor to buy even one share.

So how is a mere mortal supposed to grab a stake?

Well, I’ve recently discussed two option strategies that could work extremely well with Amazon, and I think it’s appropriate to cover them once again.

Buying Amazon For 62% Off? Yep.

Just like the Prime deals on the Amazon website, the first amazing option strategy involves buying a deep-in-the-money (DITM) call option.

This approach can save you 62% off the full price of the stock, plus it can more than double your returns.

Please note: I’m about to go through the details on some real live trades, but they’re not an official recommendation from me or my team. There will be no follow-ups or trade alerts on this play.

Read on to understand how this strategy works and learn how to execute this trade for yourself.

Alright, the following is based off an $1,815 stock price for Amazon. Take a look at the June 21, 2019, Amazon $1,180 call option, which trades for $690.00 per contract at the time of writing.

With the $100 option multiplier, buying one of those call options would cost $69,000 ($690 x $100). This would allow you to control a bullish position of 100 shares of Amazon stock.

That seems like a lot of money.

But compared to the current cost of buying 100 shares of Amazon for $181,500, the call option seems like a steal.

For 11 months, you can control 100 shares of Amazon stock for roughly 62% off the current sticker price.

Taking this option trade also reduces your total risk in the trade to 62% less than purchasing the shares.

If Amazon goes belly up, the most you can lose with the option trade is what you paid for it – in this case, $69,000.

But if you bought the stock, you’d be out the full $181,500. That’s much harder to swallow.

On the profit side, the call option will more than double your return on investment compared to purchasing the stock directly.

Let’s say AMZN goes up $100 per share by next June 2019.

You’d make $10,000 on your 100-share stock purchase – a 5.5% return ($10,000/$181,500).

With the call option sporting a 90% delta, its value would be worth roughly $780 per contract at that time, giving you a profit of $9,000 (($780 – $690) x $100 multiplier).

The return would be 13% ($9,000/$69,000). For those keeping score, that’s more than two times the stock’s return.

Not only does the call option cost you 62% less, it reduces your risk by 62% andit more than doubles your return. A much better deal in my book.

Keep in mind that buying the DITM call option is a very bullish play; you’d only want to do this trade if you believe Amazon is going to go up over the next year.

Getting Paid For Your Promise

We’ve discussed this next strategy many times so far, and it’s the core concept of my Instant Income Alert newsletter service.

We get paid cash in exchange for promising to buy any stock we choose at any price we choose.

If we like Amazon, but only wish to buy it at a cheaper price, we can receive varying amounts of cash up front, depending on our buy-in level.

What’s your Amazon price point?

Want to buy it at $1,500 per share?

Well, a June 2019 $1,500 put option is going for $67.50 per contract.

If you sold that contract, you’d receive an incredible $6,750 in instant, up-front cash in your trading account.

Why?

Because you’re agreeing to buy 100 shares of Amazon for $1,500 per share if and only if Amazon trades below $1,500 by June 2019.

If Amazon falls that far, you’ll be obligated to buy the 100 shares and lay out $150,000 for the purchase. Plus, you get to keep the $6,750.

If Amazon doesn’t fall to $1,500 by next June, then the option expires, and you just keep the $6,750. You don’t get to buy the shares, but that’s a pretty nice consolation prize, no?

If $1,500 per share still seems too high for you, then how about selling the June 2019 $1,200 put option. It’s going for $19.60 per contract.

Selling one of those contracts will net you $1,960 for your troubles and obligate you to buy 100 shares of Amazon at $1,200 per share by next June, but only if Amazon is trading below $1,200 per share by then.

Are you starting to see how this works?

You’re getting paid to potentially buy stocks on the cheap.

The way Amazon has been trading, it seems unlikely that the stock would fall to those levels by next year.

But, in case it does, make sure you only sell put options at strike price levels that coincide with where you’d feel comfortable buying 100 shares of Amazon.

You never know what could happen, and you’d need the cash to pay for the stock in full, too.

So there you have it, a Prime deal on Amazon’s own stock!

And, again, please note that I’m not going to follow up on these trades. Sometimes understanding a new stock strategy requires watching trades in real time to get a feel for the whole process.

Lee Lowell

A former Wall Street insider and floor trader, Lee Lowell has worked in the market for nearly 30 years now. He began his option trading career in 1991on the floor of the New York Mercantile Exchange (NYMEX) in New York City.MORE FROM AUTHOR